Financials Rally at Odds with Credit Cycle

Financials have been the biggest winners since the Trump election  The S&P Bank ETF KBE has rallied 29% since the election.  We’ve written about financials over the past few weeks, but it is worth highlighting again. While we may see financials rally in the short run due to momentum chasing by investors, it is much more likely we’ll see weakness ahead.  Interestingly, insider sales at financials are running at historical extremes, so clearly banks CEOs and CFOs agree with us.

The US credit cycle turned negative in late 2015, and we’ve seen tightening of lending standards in a variety of categories (commercial & industrial, commercial real-estate, consumer) and we’ve also seen a decline in demand for loans.  At the same time, we’ve seen increases in delinquencies across banks, particularly in auto lending.  Banks are very cyclical and tend to respond to the credit cycle.  Chasing banks higher when the credit cycle has turned will not turn out well.

img1img2Source: Bloomberg and Variant Perception