The relatively flat stock market over the last six weeks or so belies a pretty interesting rotation underneath the surface.
For August, utility and telephone stocks were the hardest hit sectors while financials were the best performing:
As a result, financial shares have "broken out" as the cool kids like to say, meaning the shares, indexes and ETFs of banks and the broader financial sector have reached their highest levels in some time after stagnating below 2015 levels for most of the year. JPMorgan Chase, Citigroup, Wells Fargo and Bank of America, for example, are trading near their highest prices since January or earlier.
Occam's razor would suggest a simple explanation for the rotation: The prospect for interest rate increases has grown significantly after almost 550,000 jobs were added in the U.S. in June and July. And the talk from Federal Reserve officials suggests that at least one rate hike could be in the cards before New Year's. Higher rates, the thinking goes, benefit banks and insurance companies but are a negative for sectors like utilities and telecommunications, whose appeal comes from reliable bond-like dividends.
The Occam's razor explanation, however, isn't 100 percent satisfying. For one thing, long-term Treasury rates haven't moved that much over the same period. They perked up somewhat after Janet Yellen indicated in a speech on Friday that a September rate increase was not off the table, but they have since moved back into their old ranges.
And most yield curves -- a rough indicator for the outlook for profit margin from bank lending -- have only flattened more as bank stocks have rallied, with the notable exception of the closely watched difference between the three-month and five-year rates:
But even that curve isn't moving drastically higher, so maybe there are other causes: a simple rotation from sectors that were arguably overvalued to one that was arguably undervalued. Bank stocks were hit harder by Britain's vote to leave the European Union, and took longer to recover, than the rest of the market. The KBW Bank Index sank 12 percent in the two-day selloff that followed the June 23 vote and did not recover completely until Aug 5. The S&P 500, by comparison, fell 5.3 percent in two days and recovered by July 8.
Then there's the fact that this is August, after all, when volumes are low and boredom is high, suggesting maybe we shouldn't take this month's trends too seriously.
However, there's one other angle to consider, and that is America's favorite contact sport (at least until Week 1 of the NFL): politics. Jeffrey Saut, chief investment strategist at Raymond James, wrote in his daily note on Tuesday that some people had been emailing him to suggest that the breakout in financials could be driven by the potential for a Donald Trump presidency because he has suggested he would loosen some of the laws that have been a burden to Wall Street.
"While I seriously doubt that is the reason for said breakout," Saut wrote to clients, "in this crazy election, who knows?"
I tend to agree with Saut on both ends of that quotation: the seriously doubt it part, but also the "who knows" when it comes to this crazy election. It's hard to see what in the poll numbers would make people think Trump's chances have improved much:
And in fact, the recent risk-on sentiment in the equity markets could be a sign that the race may be a blowout in favor of Hillary Clinton, according to a report that Luke Kawa wrote about from Bank of America Merrill Lynch's head of global rates and currencies research, David Woo.
It's a reminder that when politics are thrown into the mix, financial markets can tend to be like a Rorschach test: Everyone finds something to look at, but not everyone sees the same thing.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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