Rising rates play head games with stocks in new year
The year 2014 has started off on a strange note.
I think we are all getting fatigued about early warning indicators, so here, hopefully, is my last comment on this. This is only the seventh time the S&P 500 has started the year with three down days since it was established in 1928. However, in six of those seven years, it posted an annual gain.
The belief that 2014 will see modestly higher interest rates is the primary story so far, and that belief is affecting stock pricing in the first three days of the year. Look at three interest-rate sensitive groups so far:
1) Home builders are down 2.5 percent;
2) Utilities are down 1.7 percent, and;
3) Banks are up 0.7 percent.
I noted yesterday that big-cap banks have had a strong start to the year. Earnings expectations do not seem to have changed; instead they are experiencing a multiple expansion at the start of the year on the prospects for higher interest rates. Big banks have been relatively cheap compared to regional names, and it is interesting to note that regional banks like M&T and Zions have been under-performing money center banks.
The problem I have with this is that while a steeper yield curve does help, what really matters is for short-term rates to go up, particularly since many loans are based on indices tied to short term rates, like LIBOR. Yet short term rates are not rising, so the earnings impact is still muted for banks.
Still, there is a clear move up in big cap stocks so far this year, at the expense of regional banks:
- Bank of America up 7.0 percent
- Citigroup up 3.3 percent
- JPMorgan up 0.9 percent
- M&T Bank down 1.4 percent
- Zions down 1.0 percent
Importantly, several regional banks were upgraded this morning: BB&T was upgraded at JPMorgan, SunTrust upgraded at BMO Capital, noting a recovery in loan and fee growth and a greater decline in expenses than its peers. First Republic downgraded at BMO.
We will be starting earnings season for real next week with many of the big banks reporting. While I see good news in the steepening of the yield curve, I also see lots of not-so-good-news:
1) Loan demand is soft;
2) Mortgage fees are weak;
3) Trading is light, and;
4) Repricing bonds are pressuring portfolio yields.
The U.S. trade deficit isn't normally a market mover, but the November stats this morning were significant for gross domestic product (GDP). The trade deficit fell to $34.3 billion from $39.3 billion in October, well below estimates and the smallest deficit since June. Exports are at a record high (!).
Peter Boockvar estimates this could raise Q4 GDP estimates by as much as .4 of a percentage point.
—By CNBC's Bob Pisani