Bank Sector Likely to Show Steadiness as 2020 Presidential Election Cycle Looms
About a month ago, we analyzed the financial sector where individual banks were considered for investment. This time, we are back to this sector again, since in the current conditions it cannot be ignored. This time, however, we are going to analyze ETFs that include financial sector papers.
When analyzing the S&P 500, there are doubts about its further growth, unless there’s a correction towards 2,400. But in order for such a correction to take place, some significant event must occur that will scare off investors and force them close their positions for a while, locking in profits. The S&P 500 reacts sensitively to the presidential elections and programs adopted by new US leaders.
For example, Barack Obama took over as president during the mortgage crisis, and he had to solve the problems of growing debt, which later exceeded 100% of GDP, and look for new ways to develop the economy after massive bankruptcies of companies. At that time, the S&P 500 lost 67% in 18 months and reached its 2002 lows, which was the result of the dotcom crisis. Later, however, Obama’s administration managed to find a solution by quantitative easing stimulus. The conditions for regulating the financial market, the crisis driver, were tightened, the financial service users protection was strengthened, and measures to reduce taxes, taken under Bush Jr., were prolonged.
As a result, investors calmed down, unemployment began to gradually decline, and the S&P 500 went up to conquer new highs, which continued throughout the 8 years of Barack Obama’s leadership. The only significant correction occurred a year before the start of Obama’s second term, as investors might have decided to hedge and cash off. Nevertheless, once it became clear that Barack Obama would step in for a second term, the S&P 500 rally continued. Thus, during Obama’s administration, the index went up by 314%.
In early 2015, however, the rise ended with a strong resistance at 2,130, which the S&P 500 was able to overcome only after the presidential elections won by Donald Trump. One of Trump’s campaign promises was a substantial tax cut that would allow the US economy to grow more rapidly. Such a strategy means an increase in companies’ profits through tax cuts in order to ensure the release of money for investment in new developments that make the US businesses more efficient and competitive in the global market. At the moment, we can see its positive results: the unemployment rate in the US has fallen to its 10-year low, the S&P 500 is at its historic highs, while the company earnings reports are breaking their own records.
In 2020, the next presidential elections will be held and, as history shows, a year before the market is usually uncertain until it receives confirmation that everything will stay the same. Thus, it will be difficult for the S&P 500 to break out 3,000 at once without a significant correction. There is a very big temptation to take a long position at current prices, as fundamental analysis does not show any negative sentiment in the markets. The companies’ reports, however, have been issued adjusted since Q2 2018, and, besides, as told above, tax cuts are a great contribution to an increase in profits. In this situation, it is important to pay attention to the rise in sales, and not to profits as such, since the earnings do not show how the companies are truly doing. Earnings and profits are worth taking into account only after Q2 2019 when it will be a year after the new accounting system has been implemented.
Take Facebook for example: the stock price has been down since the Q2 report, while the earnings hit the record high. In the Q3 report, the revenue was even higher, but the stock is still down, just because high profits are no longer a positive indicator. The investors want to see many more new users, while the number is actually decreasing.
Thus, over the next 6 months, the S&P is likely to trade rangebound. Then, the presidential elections will be drawing nearer, adding more pressure to the market because of the uncertainty.
Overall, the financial sector looks less risky, as, with good earnings, it will feel great, but even in case the earnings are not so good, companies will still have to pay their debts to the banks. In addition, the Fed is very likely to continue rate hikes, which will lead to an additional profit flow.
An unexpected crisis may be the only negative factor here, but in this case any investment will be in the red.
Among financial ETFs, one may consider a few funds with over $1M managed money.
iShares US Financial Services ETF (IYF), $1.77B managed, 35% in the banking services sector, 12% in the investment banking sector.
If we break down the banking sector, the top three are JPMorgan Chase (7.13%), Bank of America (5.00%), and Wells Fargo (4.47%).
In the investment banking, 8.32% accounts for the Warren Edward Buffett Berkshire Hathaway Fund.
The next one is iShares US Financial Services ETF (IYG), with $1.7B managed. The banking sector accounts for 52.83% of the fund’s portfolio. The top three are JPMorgan Chase (12.36%), Bank of America (8.66%), and Wells Fargo (7.75%).
Yet another fund one may pay attention to is Fidelity MSCI Financials Index ETF (FNCL), with $1.27B managed. The banking sector accounts for 51.71% of the fund’s portfolio. The top three are again JPMorgan Chase (9.84%), Bank of America (7.05%), and Wells Fargo (6.42%). This fund, as well as the iShares US Financial Services ETF (IYF) has a Berkshire Hathaway investment in its portfolio (7.30%).
By Dmitriy Gurkovsky, Chief Analyst at RoboMarkets
Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.