If there is one sector that has benefited most from the Trumphoria, it’s the banks. The BKX bank index has rallied from 75 to 93 in a few short weeks.
The optimism surrounding the outlook for banks has exploded higher in a fury seldom seen.
Although I understand all the reasons for the bullishness; deregulation, lower taxes, etc…, at the end of the day, much of a bank’s business is still borrowing short and lending long. This is why bank stock performance often tracks the yield curve.
I stole this chart from the always great Jesse Felder, but I wanted to reproduce it myself in the Bloomberg:
The chart shows the yield curve (using the 2/30 spread) and the ratio of the BKX Bank Stock Index versus the S&P 500. I know most banks don’t lend out 30 years nor borrow for 2, but it is a good proxy for the steepness of the yield curve.
It is obvious the bank rally might be getting a little ahead of itself. This chasing boggles my mind. Especially when Yellen is busy talking up rates at the front end of the curve.
Have a look at the 5/30 yield spread. Yellen has driven it down to the lows.
Everyone is all bulled up on equities, and especially bank stocks, but the bond market is screaming a different story. I would find it so much easier to join the optimists if the yield curve was steepening and the US dollar was at best just rising slowly. Instead the yield curve is flattening to disturbing levels and the US dollar is rocketing higher. This is a recipe for disaster.
Now maybe I am overplaying this divergence. After all, we are approaching year end and some crazy stuff often happens. Have a look at this chart from @fullcarry:
The 5/30 yield spread bottomed right at year end for each of the past two years. So maybe this is just some seasonal anomaly.
But then again, this previous January was the worst start for stocks in history. How quickly we all forget the ugliness of those few first weeks:
No way that will happen again. Nahhh…. This rally is rooted in strong economic fundamentals and not even Yellen, the yield curve or the US dollar rally will derail it.
Thanks for reading and have a great weekend,