It is of common knowledge that we are currently experiencing the second-longest stock market rally in history as well as the second-longest economic expansion.
However, with this in mind, we must also note that expansions are ending, and that bull markets are still turning into bear markets.
We are living through an interesting phase in our history, and with this article, I will set out to break down the present significance of the financial sector.
The financial sector has been volatile as of late. Predominantly reacting to changes in yield, the market seemingly performs better when the yield curve steepens and struggles when it moves in the opposite direction.
Consumer and corporate balance sheets appear to be improving and are in substantially better shape than they were in 2008, helping us to maintain confidence in the financial sector’s ability to avoid an outsized pullback.
Corporate cash balances in many areas, such as technology, are high, but our concern lies in the increased trade tensions, which could play a role in negatively impacting corporate confidence and delay merger-and-acquisition activity.
The recent Fed rate hikes have generated positive outlooks for the sector, increasing income while solidifying balance sheets.
The recent earnings season saw a beat rate of 71 percent, according to Thomson Reuters, which is above the historical average.
However, those key positives points are threatened by the flattening yield curve. Indeed, according to fixed income experts, the financial sector reacts negatively to flattening yield curves.
That being said, I believe now is a good time to be positive though prudent.
Though we should always tread carefully, my confidence remains high in the ability of the banks to adjust to this very volatile market and act accordingly.
For any portfolio managers, there’s both good and bad news.
On the one hand, there is still time to get in on financials before the next spike. On the other hand, that window is closing considerably fast.
After being snubbed by pretty much everyone during and after the crisis, the banks are now getting more love as tax bills and rising interest rates favor them.
Normally, gains like these mean it is too late to get in. But there are still many signs that the big banks have room to run.
The technicals proving this are the Forward Price to Earnings (P/E) multiple that indicates the top five banks are trading below their five-year average, which equates to more upside.
The most important reason of them all is the dividend hike. I personally think a rising dividend is the number one driver of share prices.
The top five banks have increased their dividend on average by 939 percent in the past five years. Yet, their price gain does not nearly reflect the amount of upside that they should have gotten because of those dividend hikes.
That means the banks still have room for growth, which looks quite promising.
This dramatic moment in our history should not be overlooked, as we are living in an era which we may never see again.