Bank Macro Update & 5 Trends to Know About

Trend #1 ...

Like Mugatu said in Zoolander, “Those banks, so hot right now”. I think he was actually talking about Hansel, but you get it.

And more important to remember is that what you couldn’t pay people to buy in 2023 is now the darling of the markets.

But why?

1. Dreams of Deregulation: The financial deregulation promises from the Trump administration should set the stage for banks to thrive. These promises are for looser capital requirements, friendlier M&A rules, and pro-growth policy.

2. A Normal-er Yield Curve: Banks live and die by the yield curve. For the past few years, the inverted yield curve was an ominous warning signal, but now we’re seeing healthier slope. Borrow short and lend long 101.

3. Tell Those Rates to Be Cool: After years of massive rate hikes and uncertainty around inflation, we’ve entered a period of stability. The Federal Reserve has signaled that while rates may stay “higher for longer” the bias is to cut gently into the soft landing.

4. No Joy in CRE Doomville: For months, investors have been haunted by fears of a collapse in commercial real estate (CRE). Here’s the truth: the worst hasn’t happened. While certain segments like office space remain challenged, the broader CRE market is stabilizing.

5. Flows for Pros: Here’s a critical indicator: money talks, and right now, it’s shouting about banks. Investor flows into financial sector ETFs have surged. Since the election, just shy of $2 billion has flowed into KRE (regional banks) compared to the $3 billion or so of AUM it had pre-election.

6. Economy So Bright You Gotta Wear Shades: The U.S. economy is proving resilient. Unemployment remains low, consumer confidence is strong, and corporate earnings are holding up better than expected. Banks, as the financial engine of the economy, are uniquely positioned to benefit from this stability.

Momentum Rules Everything Around Me

Stanley Druckenmiller once said George Soros made his fortune by agnostically riding any part of market trends—not by catching the first move or overstaying the last. And while Druckenmiller himself preferred playing the turn, he too for the most part just wanted to ride trends until they proved otherwise. For investors, this is the equivalent of a hot streak at the craps table: the trend is your friend, and the smart move is to stick with it until the dice cool off. Those of you who played sports know this as a “heat check”.

And while I was browsing through names lately most if not all names looked like they had unbelievable momentum on their side. Without getting overly technical, banks overall right now are rising faster than the market (RSPM), have accelerating increases in prices (ROC), and still aren’t really in overhyped zones yet (RSI). Instead of sharing the raw data, below are a few trends producing some strong momentum and which ones I’d be willing to ride going forward.

There are 5 trends I’m seeing right now, and I’ll lay them out one at a time. Think of these like mini waves within the broader banking ocean which is seeing all boats be lifted by the tides.

If you pushed me to opine on what inning we’re in … I’d probably say bottom of the 5th. March of 2023 was the 1st inning, which was the scariest and best time to be investing.

Oh … and always remember, what the wise does in the beginning, the fool does in the end.

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