- U.S. equity markets post best weekly gain since 2013 a week after posting the worst weekly performance in two years.
- U.S. dollar finally reverses higher last week after trading to a three year low
- CBOE Volatility Index (^VIX) drops 49.3% from its Feb. 6th high of 38.33
- January’s NFIB report ticks higher (again) to 106.9 from December’s 104.9
- After falling 10.5% from recent highs, WTI crude firms and trades to $61.68/bbl
- Relatively quiet economic calendar this week – investors will focus on FOMC minutes and corporate earnings
This week should allow for a degree of “relative” temperance to take hold in markets after a week that saw volatility recede sharply, equity prices post their largest weekly gain in years and investor confidence re-emerges. In the process, and given the fact that investors have now been inoculated to the reality of a rising interest rate environment, the focus will shift back primarily to earnings. More specifically, investors will now increasingly look to ascertain which equity market sectors stand to gain the most positive price inertia in a landscape of tightening Fed monetary policy, an expanding economy and indications of modestly rising measures of inflation.
Historically, as a sector of the broader market, financial institutions have been primary beneficiaries of both an expanding economy and moderately rising interest rates. As the economy expands, companies increase R&D spending, consumers tend to take on more debt, spend more and, as a result, fuel economic growth. Financials benefit. Additionally, with rising interest rates, financials also stand to gain from expanding net interest margin (NIM). The optimism laid out by that backdrop and by the most recent earnings reports from leading names in the sector has yet to be fully priced into financials.
PowerShares KBW Bank ETF
Over the past 52-weeks, the widely watched banking ETF, PowerShares KBW Bank ETF (KBWB), has risen 18.91% versus the S&P 500 which has risen 18.51%. The 500 P/E is 22.09. Over the same period, the Dow Industrials have risen 25.17% and the Nasdaq Composite has leapt 25.40%. They have P/E’s of 20.33 and 36.26 respectively.
The largest component issues in the KBWB are:
|Wells Fargo & Co||WFC||8.45%|
|Bank of America Corporation||BAC||8.24%|
|JPMorgan Chase & Co||JPM||8.03%|
|State Street Corporation||STT||4.19%|
|SunTrust Banks Inc||STI||4.16%|
|Capital One Financial Corp||COF||4.10%|
|M&T Bank Corp||MTB||4.10%|
|PNC Financial Services Group Inc||PNC||4.08%|
The P/E ratios of these companies are well below the broader equity market indices. Wells Fargo, for example, sports a P/E of 14.62. Bank America’s P/E is less compressed at 20.49. Rounding out the top three holdings of the ETF is JPMorgan Chase with a P/E 18.17.
Financial select sector SPDR ETF
A more widely followed financial sector ETF, the Financial Select Sector SPDR ETF (XLF), has performed in-line with the KBWB over the same 52-week period but is also littered with component companies that have relatively compressed P/E ratios.
The largest component issues in the XLF are:
|Berkshire Hathaway Inc B||BRK.B||11.47%|
|JPMorgan Chase & Co||JPM||11.15%|
|Bank of America Corporation||BAC||8.63%|
|Wells Fargo & Co||WFC||8.10%|
|Goldman Sachs Group Inc||GS||2.61%|
|PNC Financial Services Group Inc||PNC||2.09%|
Given the constructive backdrop for the U.S. economy, the expected, measured and deliberate data-driven approach by the Fed to tightening monetary policy in coming quarters and the relative value found in the sector, financials may outpace the broader market in coming quarters.
Walmart vs. Amazon
Large-cap companies providing Q4 results this week include retail giants Walmart (WMT) and Home Depot (HD). Walmart missed on earnings and provided full year guidance that fell short of analyst expectations. Though its sales growth topped estimates at 2.6%, Wall Street seems to be taking a dim view of its e-commerce growth that fell from 50% to 23%, as its acquisition of Jet.com finally rolled fully into the comps. Nevertheless, it provides a window into its evolving corporate strategy to battle Amazon (AMZN). That battle is being fought on many fronts — from apparel to groceries from digital to delivery.
This week’s economic calendar is shy one trading day – President’s Day. It is also light in terms of data releases. As a result, we will be hearing from more Fed officials than we have recently. Seven talks are scheduled for Wednesday through Friday. Fed officials aside, the primary focus for investors in terms of the calendar this week will be the Wednesday release of the FOMC minutes from the last meeting. Also on Wednesday, we receive the PMI Composite Flash reading for February. Bloomberg consensus is calling for 54.0 versus January’s 53.8. Additionally, I expect the recent dramatic sell-off and modest rebound in WTI crude oil to focus investor attention on the EIA Petroleum Status Report, due out on Thursday at 11:00 AM.
Last week’s EIA Petroleum Status Report reflected a 1.8 M bbl build in crude inventories, as well as a 3.6 M bbl build in gasoline inventories. The degree to which WTI crude is able to hold last week’s gains will be largely dependent on the inventories data in the EIA report. Additionally, the Baker-Hughes Rig Count, which last week saw a decline to 1,293 from the previous week’s 1,300, could well play a role in the near-term price action in WTI crude. A draw-down in inventories in the EIA report this week in conjunction with even a modest contraction in the rig count would bolster crude prices above $60/bbl.
On Thursday, Leading Indicators for January are released. Bloomberg consensus is expected a reading of 0.6% – matching December’s number.
Commentary by Sam Stovall, chief investment strategist at CFRA Research
The S&P 500’s intra-day decline last Friday apparently stretched, but did not break, its 200-day moving average, allowing it to respond in a sling-shot fashion by launching the index more than 6% in the subsequent four trading days. Since recoveries from sharp sell-offs require reassurances, however, the S&P 500 will likely have to re-test its recent low. We think this will present a second buying opportunity, rather than usher in a new bear market, since we don’t see a recession on the horizon.
7:00 AM Mortgage Applications
9:45 AM PMI Composite Flash
10:00 AM Existing Home Sales
2:00 PM FOMC Minutes
Patrick Harper, 9:00 AM
Neel Kashkari, 8:15 PM
8:30 AM Weekly Jobless Claims
9:45 AM Bloomberg Consumer Comfort Index
10:00 AM Leading Indicators
11:00 AM Kansas City Fed Manufacturing Index
11:00 AM EIA Petroleum Status Report
William Dudley, 10:00 AM
Raphael Bostic, 12:10 PM
1:00 PM Baker-Hughes Rig Count
William Dudley, 10:15 AM
Loretta Mester, 1:30 PM
John Williams, 3:40 PM