Round and round it goes, where it stops nobody knows! Watching the macro news flow, it certainly feels like a merry-go-round traveling a bit too fast to provide the riders any comfort. The issues of the day seem to circle back again and again at a remarkable pace. It can be difficult to set a framework when the parts keep moving. Are we in Trans Pacific Partnership, or are we out? Is it $50bln in tariffs, or $150bln? Are we saying the tariffs are going to get enacted, or were we just using them verbally? Which cabinet spot is being re-cast and what is the incoming view on the major issue? Are we planning on a military response in Syria or not? Which technology company is in the crosshairs today? Why are former FBI Director Comey and President Trump trading barbs again? The list goes on. From a macro investor standpoint, you cannot build a thesis when the ground is constantly moving.
So let’s instead look at it from the bottoms up. The first earnings announced this season came from banks. For the most part, they beat (increased) expectations. It was a great quarter! Despite that, stock investors sent bank stocks lower. A franchise like JP Morgan that beat both revenue and earnings consensus soundly suffered concerns that lending growth is not as quick as would be expected. Wells Fargo too beat on the top and bottom lines, but suffered the same declining share price adding ongoing overhang of regulator penalties to the concerns. While banks have said for some time that profits will grow with rising rates, there is a second edge to the sword. While income from net interest margin is higher, so is the cost of debt financing. In addition, borrowers’ worry that rates would rise pulled forward their lending needs and might have left a bit of a gap for further economic growth (and thus capital requirements) to fill. The Financials sector has done well for the past several quarters up roughly 40% since November 2016 when the new administration brought with it the expectation of falling regulations and increasing rates. The sector may have to wait its turn for the good times to come back around again.