Regulars of this blog – along with clients of ValueTrend – recognize that we were amongst the very early adaptors to the inflation trade. I wrote about buying oil and metals in the fall of 2020 when prices were half of what they are now. We also jumped on the inevitable rising rate trade during the summer of 2021. Recently, we added to the rising rate trade when the market fell to 4300, having sold some stocks in December and early January after I identified a highly likely pullback potential here. The market corrected as my blog suggested. I then wrote this and this blog, imploring you to consider legging into the dip at 4300. I do hope you read those sell, then buy blogs and took action. You’re richer for it if you did
As an aside, we display our Equity Platform results online. Many small investment managers don’t do this. ‘They don’t want you to see how they’ve been doing, for some reason. We view things differently. We feel that if we are walking the walk – and not just talking the talk – our results will act as proof of our analysis. Every month we report these results. Feel free to visit them here. Of interest, most investors can make money in a bull market – there’s not much skill to that. ValueTrend follows an active timing strategy. That’s when will find our results differ. The reason we have beaten markets is not because we beat the market when things are going up. Nope, we make the difference when markets get weak – as they have lately. Limit your risk, to keep your money.
Back to the rising rates trade. Financials tend to be the best bet when markets are rising. Banks squeeze higher margins out of higher mortgage and loan rates. Insurance companies squeeze greater profits as they roll treasuries into higher rates in their capital investments. Brokerages realize continued trading profits as markets rotate out of growth and into value and interest benefiting sectors. Investment banking enjoys the rotation into new products and issues as investor demand rotates in new directions. Its a party on wall street!
Below is a chart of the SPDR financial ETF (red) vs 1-year treasury rates. Its a mixed bag of the above financial stocks. What I wanted you to see is how, over a 20 year period, the relationship between rates and financials has been consistent. When 1 year yields rise, the financials rise. When yields fall, financials fall. The pane below price shows us how correlated these two things are. The more time above the zero-line, the more they are moving in lockstep. I’ve placed a huge circle highlighting just how much time the correlation between rates and financials is positive. In other words, its a good bet that if rates rise, financials will rise.
There was a reason why ValueTrend held financials in the second half of the year, despite that rates had not yet begun to rise and there were no decisions yet made by the Fed. Earning season does help to drive markets up into year end for the sector. The patterns were positive for the sector, and the seasonals are good in the final half of the year. The seasonal chart below shows us a clear pattern for good performance from July to /December. Then the sector takes a rest until March, after which it explodes up for a final run into May.
The clear relationship for financials to rise as rates rise, along with seasonal patterns that favor the sector from March until May add fuel to a sector that has clearly broken out. We hold somewhere near 15% of our Equity Platform in the sector – split between Canadian banks, one foreign bank, and a few US stocks. While we’ve earned good profits from our holdings thus far, we anticipate more to come before the summer.