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STA Weekly Market Report – Is The “Trump Rally” In Reverse?

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Is The “Trump Rally” In Reverse?
Chart of The Week “US Banks’ Outperformance Erodes
401k Plan Manager **Recently Updated!
Weekly Technical Comment
Weekly Snapshot of Global Asset Class Performance
Featured Articles & Interviews

Is The “Trump Rally” In Reverse?

I hope you all had a blessed Easter Holiday. It was a disappointing holiday week for stock investors. The large cap S&P 500 fell 1.2% and the small cap Russell 2000 declined 1.4%. Hardest hit were Basic Material and Finance stocks which were both down 2.5% or more on the week. Only Non-Cyclical and Utilities were able to escape the week’s downward trajectory.

In our March 21st , report entitled “Animal Spirits Are Not Always An Accurate Gauge” we stated the following:

“The S&P 500 is up over 6%, however, so far this year analysts’ earnings estimates are lower over the same time frame. This tells us the rally has largely been based on expectations for the future. This enthusiasm is also reflected in sentiment measures, with the Volatility (VIX) Index down almost 20% since the start of the year, indicating a downturn in fear (see Chart of the Week).  The signs are everywhere that investors are perhaps too enthusiastic about the market.”

We further stated the following:

“Due to the current elevated levels of long term valuation measures, we should expect increased volatility in the stock market. We believe this is when STA has typically shined as we strive to offer capital preservation in rocky markets. There may be opportunities to make money as “animal spirits” may not dissipate soon, but risk levels are presently high and a large decline is possible. “

Since these comments were made, market volatility has become the watch word. The Russell 2000, for example, is negative year-to-date. Remember our weekly technical commentary in our March 14 report entitled “ Small Caps May Be Warning Sign”?  The S&P 500 is now trading below its 50-day moving average for the first time since the election (yet still just 3% shy of its all-time high so hardly oversold on a technical basis). The cheery days of the “Trump” rally seem far away. The next range of technical support on the downside is 2250-2275.

While it was a challenging week for stocks, it was a good week for the U.S. bond market as all sectors had positive total returns except for High Yield bonds. The 10-year Treasury note yield has broken lower to levels last seen in November (down to 2.2%). The U.S. Treasury bond yield curve also flattened as yields on longer term maturities generally fell more than shorter term maturities.

U.S. growth forecasts for the first quarter have come down steadily. In December, the average forecast called for 2.3% annualized growth in the first quarter. The Atlanta Fed GDP Now forecast is now only 0.5% for the first quarter. Unfortunately, the surge in consumer and business confidence (soft data) has not translated into higher economic growth. Thankfully bonds tend to perform relatively better during poor economic times and can offer diversification benefits.

Then came the real shocker – March retail sales. Retail Sales dropped for the second month in a row. The biggest declines came in the building materials, vehicles, and gasoline areas. Sales lead economic growth so this is a key area to watch going forward.

The important factor for investors to watch is whether the good “soft data” translates in good “hard data”… or not.  While the Trump Rally presented nice positive momentum in the markets, investing around politics is a very dangerous game to play.

Chart of the Week: US Banks’ Outperformance Erodes                                             

Following the U.S. election on November 8th, 2016 we saw financials outperform the S&P 500 index by a wide margin. The outperformance was fueled by optimism on several fronts including bank deregulation and tax cuts. Amidst doubts about the Trump administration’s ability to push through pro-bank policy changes since the end of February, the outperformance of the financial sector has started to erode. Our chart of the week shows the shift we have seen over the last six weeks with the KBW Bank Index, which represents a basket of 24 national money center banks and leading regional institutions, and JPMorgan Chase (JPM) performance beginning to erode versus the S&P 500.

*Click to Enlarge

This is especially interesting as we kicked off earnings season for banks on Thursday of last week with earnings reports from JPMorgan, Citigroup, and Wells Fargo. From these initial reports we got a glimpse of how these businesses were holding up through the most recent quarter and got updates on their expectations as they look ahead. What follows are a few key takeaways from bank earnings calls that could have implications for portfolios.

  1. Net Interest Margins have shown signs of improvement but risks remain

With short-term interest rates moving higher, banks are now showing an improvement in net interest margins and income. JPMorgan for example saw an uptick in their net interest margins this quarter which helped support about half of their revenue growth. Higher Net Interest Margins are a positive development for banks as they help boost top and bottom line results. That said, the big risk is that short-term rates continue moving higher while long term rates remain near current levels. This would flatten the yield curve and likely hurt net interest margins in the intermediate term.

*Click to Enlarge Source: JPMorgan Company filings, Bloomberg Financial Senior Writer Yalman Onaran

  1. The Trump reflation trade boosted trading activity for banks during the quarter

The Trump reflation trade provided support for several asset classes including Fixed Income, Currency and Commodities (FICC). FICC trading results from both JPMorgan and Citigroup were strong during this past quarter. If JPMorgan and Citigroup are a reliable proxy for what to expect from other banks, then we could potentially see positive trading results also reflected in upcoming bank earnings reports for the quarter. Of course, context is always important and the year-over-year percentage change is likely inflated as it is a comparison against a weak first quarter in 2016.

*Click to Enlarge

  1. Bank management teams still see reason for optimism on the U.S. economy despite policy uncertainty

Despite a lack of clarity on where we go from here in terms of policy changes, the banks that reported were largely optimistic on the economy. As Michael Corbat, CEO of Citigroup said in his opening earnings call remarks, “We also continue to be positive about growth in general and the U.S. economy. While the details of potential policy changes in areas such as tax code and infrastructure spending have yet to be worked out and will take a little longer than originally projected, we continue to believe that it’s a matter of when and not if these changes will occur. As that process unfolds and outcomes become clear, I expect business will react accordingly as sentiment shifts from optimism to confidence.”

Jaime Dimon, CEO of JPMorgan, was similarly optimistic on the economy as he discussed both the U.S. consumer and businesses and what has looked like a pick-up in economic momentum saying “U.S. consumers and businesses are healthy overall and with pro-growth initiatives and improving collaboration between government and business, the US economy can continue to improve.”

Based on these comments, it appears that they are aware that things have improved from a sentiment standpoint, but we may be nearing a time when investors want policy action. Whether we get it sometime soon remains to be seen but would be key to building some meaningful economic momentum going forward.

Weekly Technical Comment

Short-Term Trend Continues to Weaken

The short-term trend for the market continues to weaken. In last week’s Technical Commentary, I wrote the following about the S&P and its 50-day trend-line.

The index is just barely hanging on at this level and should be watched carefully.”

The S&P 500 SPDR (SPY) is trading below its 50-day line as well. A glance at the volume bars along the bottom of the chart shows that the red bars have been larger than the green ones. That means more recent selling than buying. A test of its March low now appears likely.

*Click to Enlarge

Small Caps And Financials Lead Market Lower

Small caps did even worse last week down 1.4%. The chart below shows the Russell 2000 iShares (IWM) nearing a test of its 2017 low. Relative weakness in small caps is normally a caution flag for the market.

*Click to Enlarge

The Financials SPDR (XLF) chart shows the sector falling to a three month low. The breakdown in bond yields was the main reason why financials are falling.

Also, the results of the latest U.S. bank earnings releases were disturbing to say the least, especially if you have a bullish bias towards growth:

  • Commercial loan balances didn’t change at J.P. Morgan and Wells Fargo compared with the fourth-quarter of 2016.
  • New auto loans declined 17% at J.P. Morgan and 29% at Wells Fargo compared with the first quarter of last year – the giant consumer lending bank came right out and said that signs rising delinquencies and deteriorating used-car values are causing the bank to be more cautious.
  • In Citigroup’s North American consumer-banking group, profit fell 25%, driven by credit losses in some credit cards.
  • At J.P. Morgan’s and Wells Fargo’s consumer-banking arms, profit fell 20% and 9%, respectively.

*Click to Enlarge

10-Year Treasury Yield Falls To Five-Month Low

Bond yields have been slipping since March as investors have had second thoughts about the so-called Trump bump in stocks and the economy. Geopolitical concerns may also be causing profit-taking in stocks and buying of safe havens like bonds and gold. That risk-off rotation took on more significance today. The chart of the 10-Year Treasury Yield show the yield falling below its 2017 low to the lowest level in five months.

*Click to Enlarge

Since bond prices travel in the opposite direction, they’re breaking out to the upside. The last chart shows the 7-10 Year Treasury Bond iShares (IEF) trading at a five-month high. It’s now headed toward its 200-day moving average.

*Click to Enlarge

Weekly Snapshot of Global Asset Class Performance

*Click to Enlarge

Sector Relative Rotation Model

The Sector Relative Rotation Model shows what sectors of the S&P 500 are strengthening and what sectors are weakening relative to the index. In other words, what is driving returns versus detracting from them.

The chart below (updated through April 17, 2017) indicates relative strength (relative to the S&P 500 Index). Technology, Consumer Discretion, Utilities and Healthcare are leading relative to the S&P 500. Energy and Small Caps are currently lagging.  Financials, Materials, and Industrials indicate weakening, with Consumer Staples and REIT stocks indicating improvement in the model.  Keep in mind while this model is helpful to analyze sector strength in the S&P 500, it is one tool and should be used with a comprehensive investment discipline.

Note: There are four quadrants on the chart:

  • Leading (Green) – strong relative strength and strong momentum
  • Weakening (Yellow) – strong relative strength but weakening momentum
  • Lagging (Red) – weak relative strength and weak momentum
  • Improving (Blue) – weak relative strength but improving moment

Featured Articles & Interviews

Josh McGee, Ph.D
On Financial Planning Friday, Scott Bishop, Executive Vice President of Financial Planning for STA Wealth Management hosts a special edition of the STA Money Hour with guest Dr. Josh McGee Ph.D. Josh McGee is a vice president at the Laura and John Arnold Foundation and a senior fellow at the Manhattan Institute.  McGee is an economist whose work focuses on public pensions and finance and he routinely provides expert testimony and technical assistance on municipal retirement plans like the Houston Police Officers’ Pension System (HPOPS) for the city of Houston. ”

Councilman Jack Christie
On Financial Planning Friday, Scott Bishop, Executive Vice President of Financial Planning for STA Wealth Management hosts a special edition of the STA Money Hour with guest Houston Councilman Jack Christie ( Councilman Christie is the Chair of the City Council’s Budget and Fiscal Affairs Committee.  As most of our Houston Police Officer clients feel that their HPOPS Pensions are in trouble, we wanted to get the Councilman on the show to share what Council Christie s doing in terms of Pension Reforms.

Tax Planning Environment in 2016
Written By: Scott Bishop, Director of Financial Planning

If you have any questions, please feel free to email me at


STA Investment Committee
Luke Patterson, CEO & Chief Investment Officer
Michael Smith, President
Andrei Costas, Senior Investment Analyst (Equity Strategies)
Nan Lu, Senior Investment Analyst (Fixed Income Strategies)

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