Futures for the Dow Jones industrial average, S&P 500 index and Nasdaq 100 rose about 0.1% late Tuesday.
The major averages edged lower in Tuesday’s stock market trading, with the S&P 500 and Nasdaq composite snapping seven-day winning streaks. Several big-cap tech giants hit fresh all-time highs, but bank stocks were among the notable losers, including JPMorgan Chase (JPM), Goldman Sachs (GS), Bank of America (BAC) (but not Citigroup (C)).
XAutoplay: On | Off Bank stocks were big leaders of the so-called Trump rally following the presidential election. But the stocks have struggled for several months. Here are four reasons to look beyond the banks to other sectors.
Stock Charts Weak
Dow industrials component JPMorgan Chase narrowly avoided undercutting the low of its base Tuesday, setting a four-month closing low. JPMorgan Chase, fellow Dow stock Goldman Sachs, Bank of America and Morgan Stanley are all below their downwardly sloping 50-day moving averages, with Wells Fargo (WFC) under its 200-day for good measure.
Relative strength lines, which track how stocks perform vs. the S&P 500, highlight how financials have lagged in 2017. JPMorgan’s RS line has fallen to its lowest levels since Election Day, with other banks’ RS lines showing similar weakness.
Citigroup is an exception. Citi is just below a 62.63 buy point in a flat base, and is still in range from an aggressive entry at 60.89. Citi’s RS line isn’t great but has risen fractionally over the past four months.
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Tax Cuts Sidelined
A big reason why bank stocks, and the overall market, rallied on Trump’s election was the prospect of tax cuts and other pro-growth measures. But Trump has been embroiled in troubles, distracting the White House and sapping his political capital. Republicans are divided on key issues, including how much to cut and how to offset the lost revenue, if at all. Wall Street appears to be pricing-out prospects for major tax reform, at least in 2017.
Bank executives, and perhaps investors, are still hopeful that the Trump administration will ease financial regulatory burdens that limit lending and buybacks.
Stronger economic growth should spur demand for loans, but it also should encourage higher interest rates and wider spreads between banks’ short-term funding costs and long-term lending rates. Yield spreads widened after the election. But with the Federal Reserve raising short-term official rates and the 10-year Treasury yield sliding toward 2017 lows, the yield curve is the flattest in seven months. That’s bad news for banks’ net interest margins and not a great sign for the economy either.
Bank stocks are going through a lull right now. Perhaps they’ll turn around soon. But looking at long-term charts, bank stocks haven’t really outperformed the S&P 500 for long stretches, even well-run operations such as JPMorgan. Bank stocks have had short-term outperformance, such as in last few months of 2016, but banks are not secular market leaders.
If investors want to follow the market, buying a broad index mutual fund or ETF (with banks a significant part of the holdings) can do that without the sector risk.
Japan’s Nikkei fell 0.1% intraday. China’s Shanghai composite and Hong Kong’s Hang Seng, both of which had been closed on Tuesday, rose 1% and 0.4%, respectively.