Financials Flounder
Big banks like Wells Fargo, Bank of America, and JPMorgan Chase slid on Tuesday as did financial services ETFs. Let’s see what’s going on.
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That was ugly. Not the broader marketplace. No, stocks in general, performed well enough on Tuesday, largely holding onto the sizable gains that had been made on what was an enthusiastic rally on Monday. The Sarge-folio had another nice day on Tuesday as certain tech stocks, again led the book in a northerly direction. That said, the two bank stocks still on my book, JPMorgan Chase (JPM) and Bank of America (BAC) were roasted for more than 3% apiece on Tuesday. Did I really leave myself exposed to these two names? Neither is close to a top holding in that portfolio, but the answer is “afraid so.”
For the regular session on Tuesday, the S&P Financial sector SPDR ETF (XLF) suffered a loss of 1.97%. as the KBW Bank Index gave op 2.38% and the Dow Jones U.S. Banks Index surrendered 2.86%. Among U.S. banking giants, Wells Fargo (WFC) led the way lower with a loss of 3.92%, with JPM (-3.42%) close behind. As a matter of fact, since peaking in mid-August, JPM has given back 6.8%. So, what gives?
Quite obviously, of late, the slope of the Treasury yield curve has been no friend to traditional bankers. Spreads between what short-term debt securities pay out and what longer-term debt securities have been flattening dramatically over a short time frame. While the Federal Reserve’s Federal Open Market Committee has increased its target range for the benchmark overnight Fed Funds Rate, forcing investors out of short-term debt securities, bond traders have not fled the long end of the curve. The result is a U.S. Ten-Year Note that yields just 19 basis points more than does the U.S. Two-Year Note.
That does not quite wake up the echoes of those who (myself among them) will start talking and writing about the predictive powers of yield curve inversions whereas contractions in economic activity are concerned. That said, we had better pay some attention. That particular spread was close to 75 basis points wide just six months ago.
Talk of an oncoming economic recession might seem silly with the Atlanta Fed’s GDPNow model still sporting Q3 growth of 5.1% (q/q, SAAR), but to keep expectations in check, the New York Fed’s NowCast model currently shows Q3 growth of 2.33%. Not exactly recessionary alarm-worthy, but admittedly a long way from 5.1%. Perhaps lower fuel prices, as WTI Crude has seemingly collapsed (-16%) since mid-September, will alleviate the recent inflationary spike. Of course, that depends on how well negotiations meant to end the war in Iran proceed.
More Than Yield Spreads
Earlier this week, the sudden and surprising public adoption of Meta Platforms’ (META) Muse AI agent forced the share price of central processing unit, or CPU, designers such as Advanced Micro Devices (AMD), Intel (INTC) and Arm Holdings (ARM) sharply higher. That same idea is now forcing the share price of financial services companies sharply lower.
Is the consumer end of the financial services headed for tech-inspired disruption? Don’t look at me. The execution and institutional-facing ends have already suffered that fate. Remember those guys in the colored jackets waving paper in the air? I sure do. Now you only see them in file footage or when the financial media wants to pretend that Wall Street was “nuts” that day. The truth is that those guys that used to populate the trading floors at the exchanges or trading desks at the large broker-dealers / investment banks either had to adapt or were forced into an early retirement.
Now, the consumer end might be a little different. The relationship between the salesperson dressed up as an adviser is crucial but said relationships that drive elevated fees that are quickly becoming unnecessary will sooner or later, wear thin. Muse has reignited industry-wide fears that agentic AI will unveil tools that can create things like personalized tax strategies, while streamlining financial planning, consumer payments, and insurance coverage.
It’s not just the self-important salesman at the local branch of your bank that’s in trouble; it’s your accountant and your insurance agent, too. Their fees may be about to go the way of commissions paid by retail traders and investors as online brokerage platforms and high-speed trading algorithms removed humans from the brokerage process and from the point of sale. Yes, a couple of us old floor traders are still relevant in the U.S. marketplace. Not a lot of us though.
The Peace Process
On Tuesday, U.S. Pres. Donald Trump addressed the UN General Assembly in New York City. The president said that he faces a “big decision” in regard to the conflict with Iran. Pres. Trump said that he could “annihilate the Islamic Republic and do it quickly” if Iran does not agree to U.S. terms that allow that nation to rebuild.
As the U.S. president spoke, Iranian Pres. Masoud Pezeshkian was en route to New York City to potentially speak with American representatives. Optimism that something actually happens this time is why oil prices have literally crashed this week. After Pres. Trump’s address, U.S. envoys Steve Witkoff and Jared Kushner were said to have had a “very good meeting” with their Iranian counterparts. Iranian state media did report that foreign minister Abbas Araghchi had attended the first direct talks between representatives of the U.S. and Iran since June.
Tech Back in Charge
On Tuesday, the Nasdaq Composite and Nasdaq 100 tacked on another 0.45% and 0.82% respectively atop already healthy late summer gains. Happy autumn, by the way. The S&P 500 closed very close to unchanged on Tuesday, also holding on to those steep Monday gains. Even the small to mid-cap indexes marched forward on Tuesday.
It was again the banks and the transports that held markets back. The Philadelphia Semiconductor Index gained 2.06% on Tuesday and was for the sixth trading day in a row, the star of the show. On Monday, the CPUs led the way. On Tuesday, it was the memory/storage trade as SanDisk (SNDK) and Micron (MU) added 6.8% and 5% respectively. Yeah, it’s been a good few days.
Six of the 11 S&P sector SPDR ETFs closed out the Tuesday session in the green, as Materials (XLB) actually led on a sector-wide basis. As readers already know, the Financials led to the downside with Energy (XLE) also having a lousy day.
Breadth was reflective of the marketplace at the index level. Losers beat winners by just a smidgen at the NYSE as advancing volume took a 48.7% share of composite NYSE-listed trade. That sounds uninteresting. However, winners beat losers by a three-to-two margin at the Nasdaq, as advancing volume took a 68.7% share of composite Nasdaq-listed trade. Tuesday was yet another day of very strong Nasdaq-specific breadth. Aggregate trade across Nasdaq-listed securities has now landed above its 50-day simple moving average for five consecutive days and the direction of that market has been straight up. The professional flow of capital appears to be speaking.
Economics (All Times Eastern)
07:00 – MBA 30 Year Mortgage Rate (Weekly): Last 6.97%.
07:00 – MBA Mortgage Applications (Weekly): Last -4.1% w/w.
09:45 – S&P Global Manufacturing PMI (Sep-Flash): Expecting 53.5, Last 53.9.
09:45 – S&P Global Services PMI (Sep-Flash):
Expecting 56.2, Last 56.5.
10:30 – Oil Inventories (Weekly): Last -86M.
10:30 – Gasoline Stocks (Weekly): Last -86M.
The Fed (All Times Eastern)
10:05 – Speaker: Reserve Board Gov. Michael Barr.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: CTAS (1.34), GIS (.72), PAYX (1.32)
After the Close: FUL (1.46)
At the time of publication, Guilfoyle was long JPM, BAC, INTC, AMD, SNDK, MU equity.
