JPMorgan Chase Could Hit New Highs After Earnings

Dow component JPMorgan Chase and Co. (JPM) kicks off first quarter earnings season for the banking sector on Wednesday, followed by Citigroup Inc. (C) and Bank of America Corp. (BAC) on Thursday. The western hemisphere’s largest bank is expected to post a profit of $2.94 per-share on $29.96 billion in Q1 2021 revenue. If met, earnings-per-share (EPS) will mark a dramatic 377% profit increase compared to the same quarter in 2020.

Banks Lift into Market Leadership

Many U.S. banks have broken out above 2018 resistance in reaction to rising interest rates that should bolster industry profits for several years at a minimum. Historically speaking, rising rates are bullish for banks in the early phases of an economic boom but that tailwind dissipates as soon as rates get too high to support growth. That could happen before the next presidential election, given the current rate trajectory and trillions of printed dollars being handed out to U.S. citizens.

CEO Jamie Dimon sounded the alarm in a shareholder letter last week, warning “In an inflationary case, fiscal and monetary policy may very well be at odds. Also in this case, the cost of interest on U.S. debt could go up fairly dramatically making things a little worse. Rapidly raising rates to offset an overheating economy is a typical cause of a recession. One other negative: In this case, we would be going into a recession with an already very high U.S. deficit.”

Wall Street and Technical Outlook

Wall Street consensus has dropped to an ‘Overweight’ rating in response to Morgan’s 23% year-to-date return, based upon 16 ‘Buy’, 2 ‘Overweight’, 6 ‘Hold’, 1 ‘Underweight’, and 2 ‘Sell’ recommendations. Price targets currently range from a low of $95 to a Street-high $187 while the stock ended Friday’s session about $9 below the median $165 target. There’s plenty of room for upside in this configuration, especially if Q1 earnings results exceed expectations.

The stock broke out above the 2000 high in the mid-60s in 2016 and entered a powerful uptrend that stalled above 140 at the end of 2019. It plummeted to a three-year low during the pandemic decline and turned higher in a two-legged recovery that finally reached the prior high in January 2021. Morgan then carved the handle in a cup and handle breakout pattern and took off in a rally that could easily top 200 by the fourth quarter.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Earnings to Watch Next Week: JPMorgan, Goldman, PepsiCo, BofA, Citigroup and Delta Airlines in Focus

Earnings Calendar For The Week Of April 12

Monday (April 12)

Ticker Company EPS Forecast
HDS HD Supply Holdings $0.39

Tuesday (April 13)

Ticker Company EPS Forecast
FAST Fastenal $0.37
HCSG Healthcare Services $0.28

Wednesday (April 14)

IN THE SPOTLIGHT: JPMORGAN CHASE, GOLDMAN SACHS

JPMORGAN CHASE: The leading global financial services firm with assets over $2 trillion is expected to report its first-quarter earnings of $2.06 per share, which represents year-over-year growth of over 290% from $0.78 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of over 6%.

The New York City-based investment bank would post revenue growth of about 6% to around $29.8 billion.

“We expect JPMorgan to likely beat the consensus estimates for revenues and earnings. The bank has outperformed the consensus estimates in each of the last three quarters, primarily driven by a jump in the Corporate & Investment Banking segment led by higher sales & trading and investment banking revenues. However, the above growth was partially offset by some weakness in the Consumer & Community Banking segment due to the lower interest rates environment. We expect the sales & trading and investment banking revenues to drive the first-quarter FY2021 results as well,” noted analysts at TREFIS.

“Further, recovery in bond yields over the recent months is likely to benefit core-banking revenues. Additionally, JPM released $2.9 billion from its loan-loss-reserve in the fourth quarter, suggesting some improvement in the perceived loan default risk. We expect the same momentum to continue in the first quarter. Our forecast indicates that JPMorgan’s valuation is around $143 per share, which is 7% lower than the current market price of around $154.”

GOLDMAN SACHS: The leading global investment bank is expected to report its first-quarter earnings of $10.10 per share, which represents year-over-year growth of about 225% from $3.11 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of nearly 50%.

The New York City-based bank would post revenue growth of over 31% to around $11.5 billion.

“We expect Goldman Sachs to outperform the consensus estimates for revenues and earnings. The bank has reported better than expected results in each of the last three quarters, mainly due to its strength in sales & trading and the investment banking space,” noted equity analysts at TREFIS.

“Despite the economic slowdown and the COVID-19 crisis, the company reported strong revenue growth in 2020 driven by a 43% y-o-y jump in global markets division (sales & trading) and a 24% rise in the investment banking unit. We expect the same trend to drive the first-quarter FY2021 results as well. Our forecast indicates that Goldman Sachs’ valuation is around $366 per share, which is 12% more than the current market price of around $327.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE APRIL 14

Ticker Company EPS Forecast
TSCO Tesco £8.15
INFY Infosys $0.16
JPM JPMorgan Chase $3.06
GS Goldman Sachs $10.12
BBBY Bed Bath & Beyond Inc. $0.31
FRC First Republic Bank $1.54
SJR Shaw Communications USA $0.26
WFC Wells Fargo $0.69
ACI AltaGas Canada $0.51

 Thursday (April 15)

IN THE SPOTLIGHT: PEPSICO, BANK OF AMERICA, CITIGROUP, BLACKROCK, DELTA AIR LINES

PEPSICO: The company which holds approximately a 32% share of the U.S. soft drink industry is expected to report its first-quarter earnings of $1.12 per share, which represents year-over-year growth of about 4% from $1.07 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of nearly 6%.

The U.S. multinational food, snack, and beverage corporation would post revenue growth of over 5% to about $14.6 billion.

“Based on the 2020 performance and evolving business conditions, the company provided guidance for 2021. It expects organic revenue growth in the mid-single digits, with core constant currency EPS growth in high-single digits. It expects a core effective tax rate of 21%. Additionally, the company expects currency tailwinds to aid its revenues and core EPS by 1 percentage point in 2021, based on the current rates,” noted analysts at ZACKS Research.

“Further, it remains committed to rewarding its shareholders through dividends and share buybacks. It anticipates total cash returns to shareholders of $5.9 million, including $5.8 million of cash dividends and $100 million of share repurchases. The company recently completed its share-repurchase authorization and expects no more share repurchases through the rest of 2021.”

BANK OF AMERICA: The Charlotte, North Carolina-based investment bank is expected to report its first-quarter earnings of $0.66 per share, which represents year-over-year growth of over 60% from $0.40 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of over 9%.

However, the United States’ second-largest bank would see a revenue decline of more than 4% to around $21.7 billion.

CITIGROUP: The New York City-based investment bank is expected to report its first-quarter earnings of $2.52 per share, which represents year-over-year growth of 140% from $1.05 per share seen in the same quarter a year ago. But Citigroup’s revenue would decline about 12% to around $18.3 billion.

BLACKROCK: The world’s largest asset manager with $8.67 trillion in assets under management is expected to report its first-quarter earnings of $7.87 per share, which represents year-over-year growth of over 19% from $6.60 per share seen in the same quarter a year ago. The New York City-based bank would post revenue growth of about 16% to around $4.3 billion.

DELTA AIR LINES: The Airline company which provides scheduled air transportation for passengers and cargo throughout the United States and across the world is expected to report a loss for the fifth consecutive time of $2.84 in the first quarter of 2021 as the airlines continue to be negatively impacted by the ongoing COVID-19 pandemic and travel restrictions. That would represent a year-over-year decline of over 450% from -$0.51 per share seen in the same quarter a year ago.

The Atlanta-based airline’s revenue would decline more than 50% to around $3.9 billion.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE APRIL 15

Ticker Company EPS Forecast
CBSH Commerce Bancshares $0.94
PEP PepsiCo $1.12
WIT Wipro $0.07
BAC Bank Of America $0.66
C Citigroup $2.52
UNH UnitedHealth $4.38
HOMB Home Bancshares $0.43
USB US Bancorp $0.95
SCHW Charles Schwab $0.79
TFC Truist Financial Corp $0.93
BLK BlackRock $7.87
JBHT J B Hunt Transport Services $1.22
AA Alcoa $0.41
PPG PPG Industries $1.57
WAL Western Alliance Bancorporation $1.47
TSM Taiwan Semiconductor Mfg $0.93
DAL Delta Air Lines -$2.84
WAFD Washington Federal $0.48

Friday (April 16)

Ticker Company EPS Forecast
CFG Citizens Financial $0.96
BK Bank Of New York Mellon $0.87
PNC PNC $2.70
ALLY Ally Financial $1.13
STT State Street $1.35
MS Morgan Stanley $1.72
KSU Kansas City Southern $1.97

 

Credit Suisse Shaken by Aftershocks of Greensill Insolvency

By Brenna Hughes Neghaiwi and Makiko Yamazaki

The Swiss bank has hired external firms to help with their inquiries in the wake of Greensill Capital’s insolvency, a source familiar with the matter said on Wednesday.

The head of Credit Suisse’s European asset management arm, which sold the Greensill-linked funds to investors, along with two colleagues have temporarily stood aside, the bank said in a memo. Credit Suisse is also taking steps to recover a $140 million loan made to a Greensill company in Australia

Credit Suisse was a key source of funding for the speciality finance firm, selling securities created by Greensill to investors via its asset management arm.

The supply chain financier began to unravel last week after losing insurance coverage for its debt repackaging business, prompting Credit Suisse to freeze funds linked to it.

Switzerland’s second largest bank has hired the external firms in order to expedite the process of returning liquidation proceeds from the funds to investors, the source told Reuters.

Credit Suisse has so far made $3.05 billion worth of payments to investors. It has said further liquidation proceeds will be paid out “as soon as practicable”.

There are questions over the insurance contracts that underpinned Greensill’s securities, which were meant to protect investors in the event of a default.

Japanese insurer Tokio Marine, which provided $4.6 billion of coverage to Greensill credit notes, said that it was investigating the validity of those policies which it inherited when it bought Insurance Australia Group in 2019.

A source familiar with the situation said the policies were directly linked to the $10 billion in funds frozen by Credit Suisse.

In a note to investors on Tuesday, Credit Suisse said it had not been informed of any insurance cancellation “until very recently,” and that existing policies from Insurance Australia had remained unchanged.

Credit Suisse declined comment on the Tokio Marine probe.

If Greensill’s lending practices did not meet standards laid out in the insurance contract or were inconsistent with normal accounting rules, then an insurer would have grounds to challenge whether coverage applied, supply chain experts have said.

Greensill declined to comment.

“We have concerns about the validity of all Greensill policies and are conducting an investigation,” Tokio Marine spokesman Tetsuya Hirano said.

Hirano said that the $4.6 billion worth of coverage attributed to Tokio Marine Holdings in court filings did not reflect the likely loss. He declined to comment further.

In Germany, where Greensill runs a bank, financial regulator BaFin has filed a criminal complaint with prosecutors in Bremen, where the lender is based. The precise details of the complaint are not known.

BLOW FOR CEO

The funds’ troubles are a blow for Credit Suisse boss Thomas Gottstein, who became chief executive in the aftermath of a spy scandal and just as the coronavirus crisis struck.

The asset management unit behind the Greensill strategy was hit by a large impairment charge on a hedge fund investment in the fourth quarter.

Credit Suisse said in a memo sent to employees on Wednesday that Michel Degen, head of asset management in Switzerland and the EMEA region, was temporarily stepping aside along with managers Luc Mathys and Lukas Haas.

Reuters could not immediately reach Degen, Mathys or Haas for comment. According to their LinkedIn profiles, Mathys ran fixed income at the division and Haas worked in credit risk management. Haas was listed as the fund manager for some of the Greensill funds according to various fund websites.

Meanwhile in Australia, two people familiar with the matter said that Credit Suisse had appointed receivers to recover a bridging loan of about $140 million made to a Greensill company.

Credit Suisse was advising Greensill on a potential IPO last year and had lent it the $140 million on expectations the loan be repaid when it listed, one of the people said. Credit Suisse declined to comment and Greensill did not respond to requests for comment.

APOLLO TALKS DERAILED

Greensill was in talks to sell a chunk of its operating business to Athene Holding – an annuity seller which recently merged with Apollo Global Management – but those talks have been derailed after one of the firm’s key technology partners secured a $6 billion credit facility from a pool of banks led by JPMorgan, one source familiar with the matter told Reuters. Taulia, a San Francisco-based financial technology company that had worked closely with Greensill, expressed concern that the Apollo deal would have affected its own business model, which is based on using multiple banks for financing, two separate sources said, speaking on condition of anonymity. In a statement, Taulia confirmed it had held conversations with Apollo over their plans to purchase parts of Greensill, adding Taulia wanted to continue giving clients “flexibility in the source of funding for early payments.”

JPMorgan, an investor in and strategic partner of Taulia, came to its rescue providing $3.8 billion of an overall $6 billion credit lifeline and reducing the need for an emergency deal with Apollo, the first source said. Other banks including UniCredit, which has a commercial partnership with Taulia, are expected to commit capital and top up the U.S. firm’s credit facility, this source said. UniCredit declined to comment.

(Reporting by Brenna Hughes Neghaiwi in Zurich and Iain Withers in London; Additional reporting by Paulina Duran in Sydney, Makiko Yamazaki in Tokyo and Pamela Barbaglia in London; Writing by Alexander Smith; Editing by Carmel Crimmins)

U.S. Market Wrap and Forecast for Wednesday

U.S. equity markets opened higher on the first day of options expiration week and promptly sold off, dropping SP-500 index back into a rising channel in place since November. Bonds lost ground as well, lifting the 30-year yield to the highest high since March 2020. The 10-year Treasury note pushed against 1.3% at the same time, signaling greater conviction about rising inflation as the stimulus bill works its way through Congress.

Banks Lift into Leadership

Credit card delinquencies held firm at elevated levels in January, reflecting continued stress as a result of high unemployment. However, the United States is rapidly turning the corner on the pandemic, with crashing positives set to translate into reopened restaurants and rehired workers. Dow component JP Morgan Chase and Co (JPM) posted an all-time high, lifting above 2018 resistance. Bank sector funds look solid as a rock at 2½ year highs and could easily break out in coming weeks, benefiting from a perfect storm of financial tailwinds.

The SP-500 index is closing in on the 4,000 level, just 16 months after trading above 3,000 for the first time. It took five years to go from 2,000 to 3,000 and 17 years to make the jump from 1,000 to 2,000. Market players who love two-sided price action have been left behind by this relentless uptrend, which will end as soon as the last bear capitulates. However, it’s anyone’s guess when that will happen.

Looking Ahead to Mid-Week

Walmart Inc. (WMT) and hotel chains lead a light reporting calendar during this holiday-shortened week. Marriott International Inc. (MAR) revenue fell 57% in the quarter ending in September and the run-up into year’s end could look even worse, given international lockdowns and quarantines.  MAR and rivals are trading close to 52-week highs despite obvious headwinds but bullishness may be misplaced, given pressure on business travel in the next few years.

Wednesday retail sales are expected to show a minor uptick after better-than-expected holiday sales. Market players will also examine the Fed Minutes for clues about interest rates but Chairman Powell has done a good job telegraphing the central bank’s intention to keep rates low. Taken together with dovish comments by Treasury Secretary Janet Yellen, there’s little reason to suspect that anyone in government will be tapping on the brakes in 2021.

For a look at all of this week’s economic events, check out our economic calendar.

U.S. Market Wrap and Forecast for Friday

Major index benchmarks added to weekly gains ahead of the January Non-Farm Payrolls report. The Russell-2000 small cap index outperformed blue chips, lifting more than 2% to an all-time high. Chip stocks added a few points after Wednesday’s reversal while the 30-year Treasury bond stuck its nose above 2.00% for the first time since March 2020. Fintech issues shined after another strong quarter from market leader PayPal Holdings Inc. (PYPL).

Banks Get Bought

Speculative favorite DraftKings Inc. (DKNG) spiked into October resistance, completing the last leg of a 60-point round trip. High short interest small caps continued to deflate, signaling the demise of last week’s biggest story, which doesn’t seem too important in retrospect. Gamestop Inc. (GME) fell another 42% into the low 50s, marking the lowest low since Jan. 22. More importantly, the stock has dropped 89% off the Jan. 28 peak, trapping many Kool-Aid drinkers.

Dow component JPMorgan Chase and Co Inc. (JPM) surged into a test of January’s all-time high but the stock hasn’t broken out yet because it’s still dealing with tough resistance at the 2020 high above 140. This should be a great year for commercial banks worldwide, with the early stages of an inflationary environment widening the yield curve while generating the strongest tailwinds for the financial sector in more than a decade.

Heading Into the Weekend

Wall Street is looking for Friday’s report to add about 50,000 new jobs, much lower than the 174,000 jobs reported in Wednesday’s ADP release. The divergence between expectations and reality is more important than actual metrics at this juncture because everyone knows that millions are still out of work, waiting for restaurants, fitness centers, and travel destinations to rebuild their businesses after the pandemic runs its course.

Major benchmarks hovered around bull market highs at Thursday’s close, raising the potential for breakouts in coming sessions. The Biden administration may need to pull a few legislative tricks to pass the gigantic stimulus bill but the odds are good and Democrats don’t want to make the same mistake they made at the start of the Obama administration. Specifically, the last president made it clear there’s no advantage in seeking ‘unity’ with the other side of the aisle.

For a look at all of today’s economic events, check out our economic calendar.

Bank Earnings Off to a Rough Start

Even so, the group has booked major gains since November when positive vaccine data from Pfizer Inc. (PFE) triggered a sustained rotation out of COVID-19 beneficiaries and into 2021 recovery plays. As a result, current selling pressure appears technical in nature, driven by overbought readings.

Bond yields are rising while the yield curve steepens, signaling a more favorable banking environment that should generate higher profit margins. Revenue remains a major obstacle, with most quarterly reports so far posting substantial year-over-year revenue declines as a result of the pandemic. Dow component JPMorgan Chase and Co. (JPM) is the only bank of the big three to grow revenue in the quarter, in line with its longstanding market leadership.

JPMorgan Chase

JPMorgan Chase lifted to an all-time high ahead of last week’s strong earnings report and pulled back in a notable sell-the-news reaction. Two days of profit-taking could mark the start of an intermediate correction that targets unfilled gaps at 120 and 126. The Nov. 9 breakout gap between 105 and 110 remains unfilled as well, but that might not come into play until later in the year. When it does, it should mark a low-risk buying opportunity.

Bank of America

Bank of America Corp. (BAC) lost nearly 1% on Tuesday after beating Q4 2020 profit estimates and falling short on revenue, with a 9.9% year-over-year decline. Credit loss provisions dropped sharply during the quarter, indicating less stress on customer budgets as the world adjusts to the COVID-19 pandemic. The company announced it would buy back up to $2.9 billion in common stock in the first quarter, after getting Federal Reserve approval.

Citigroup

Citigroup Inc. (C) has booked the greatest downside of the three banks after beating Q4 2020 earnings by a wide margin on Friday. However, revenue fell 10.2% year-over-year, triggering a shareholder exodus that’s now relinquished nearly 8%. Unlike Bank of America, Citi credit losses went in the wrong direction during the quarter, rising to 3.73% of total loans, compared to just 1.84% in the same quarter last year.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

US Stock Indices Daily Recap (14th Jan) – Decline, Don’t get Caught

This market reminds me of the days leading up to Christmas Eve 2018. For those who don’t remember, it was a pretty dark day for those trading in financial markets.

I was in the office, alone, and felt particularly responsible for my clients that day. You see, since October of that year, markets had been in a tailspin lower.

“Fundamentals look good, add some exposure to equities here” I found myself saying, more than once. And just when I thought I would get a break, have a half day in the markets, and take a couple days off – boom. Markets fell 2 to 3 percent on the day .

I still remember the feeling, it was like a gut punch. We were unprepared and had added more equity exposure for most of our clients in the prior few weeks. My boss was furious, as I was responsible for allocating hundreds of millions of dollars and we were having our worst quarter ever. I vowed to never be caught unprepared and foolhardy about markets ever again after that quarter.

It was a great lesson, and one that allowed me to flourish in 2020. While I did not foresee a global pandemic, back in January of 2020, things were looking eerily similar to 2018. Markets were frothy, and it appeared that no downside was possible. And I cut exposure for my family assets significantly.

That allowed me to avoid the worst of the pullback, and in March, with an eye on the long run, I took my family assets and picked up several companies at mouth watering valuations, some we hadn’t seen in years.

So far, so good. My old boss would have been pleased – not that it matters…

And now? Well. We’re falling into the same song and dance lately, aren’t we. I have some tips below for those interested, and if you want to know how my personal portfolios have performed, slip into my DMs.

My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one where I could help people who needed help, instead of the ultra high net worth. Hopefully, you’ll find the below enlightening from my perspective, and I welcome your thoughts and questions.

Although stocks closed mildly lower on Thursday (Jan. 14), stocks have overall had a strong start to 2021.

Be that as it may, I am still concerned about overheated valuations for stocks and the return of inflation. The S&P 500 is trading at its highest forward P/E ratio since 2000, and the 10-year treasury is at its highest level since March. The Russell 2000 is also up over 37% from its 200-day moving average for the first time in its history.

Overvalued stocks combined with inflation returning by mid-year is quite concerning for me. I feel that a correction between now and the end of Q1 2020 is likely.

I like how economist Mohammed El-Erian described the market as a “ rational bubble .” But he did caution against four major risks that could cause a downturn.

The first two risks, and the least likely are the Fed pulling back on monetary stimulus and the potential for corporate bankruptcies. As Fed Chair Jay Powell said himself Thursday though, (Jan. 14) “be careful not to exit too early,”

The last two risks could be riskier.

The first is “some sort of market accident” akin to the dot-com bubble popping in 1999. THIS is what concerns me most right now. The IPO market is simply absurd right now. The DoorDash (DASH) and AirBnB (ABNB) IPOs were ridiculous, and other IPOs are looking more and more like a circus. Lender Affirm went public on Wednesday (Jan. 13) and nearly doubled. Shares of Poshmark also surged more than 130% in its debut Thursday (Jan. 14).

The other risk is the bond market and its effect on inflation. According to El-Erian, “If we were to see another 20 basis point move in yields, that would be bad news.”

Despite my concerns, it is clear to me that investors are loving the potential for a $1.9 trillion stimulus package under President-elect Biden.

Although a short-term tug of war between good news and bad news could continue, it seems to me that investors (for now) would just prefer to ride this out for what could be a strong second half of the year. According to CNBC’s Jim Cramer , there appears to be a lack of “people willing to sell”.

Be that as it may, jobless claims surged to their highest levels since August, and the pandemic is still out of control. According to Goldman Sachs’ Chief Economist Jan Hatzius, U.S. stocks and bond markets could possibly “ take more of a breather ” in the near term.

Generally, corrections are healthy, good for markets, and more common than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). Because we haven’t seen a correction since March 2020, we could be well overdue.

This is healthy market behavior and could be a very good buying opportunity for what should be a great second half of the year.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. I don’t think that a correction above ~20% leading to a bear market will happen.

Hope everyone has a great day. Best of luck, and happy trading!

S&P 500’s Valuation is its Highest in Years

Figure 1- S&P 500 Large Cap Index $SPX

Conventional wisdom would tell you that the S&P had overheated and valuations are crazy. The index’s forward P/E ratio is the highest it’s been in two decades.

But did you just see JP Morgan ’s (JPM) earnings report?

Wow.

The big bank crushed both top and bottom line estimates, and saw a net income growth of 42% from a year ago.

But look deeper into the earnings call, and there are some things to worry about. JP Morgan reported a net benefit of $1.89 billion in credit reserves and is maintaining a reserve topping $30 billion.

Why is this worrying? According to CEO Jamie Dimon, this is because of “significant near term uncertainty” due to the pandemic.

Dimon further added that despite vaccine and stimulus-related optimism, JP Morgan is holding onto these reserves in order to “withstand an economic environment far worse than the current base forecast by most economists.”

That’s a bit troubling.

The S&P 500 has been trading in a streaky matter as of late and reflects the broader tug-of-war between good news and bad. The index seemingly goes on multiple day winning streaks and losing streaks on a weekly basis. After seeing its worst sell-off since October last Monday (Jan. 4), for example, it went on a four-day win streak and broke past 3800.

We are now back below 3800. Although I always cheer stocks going up and hitting records, I want buying opportunities. I would like to see a drop to around 3600 or below before making a BUY call for the long-term.

For now, my near-term outlook is murky. A short-term correction could inevitably occur by the end of Q1 2021, but for now, I am calling the S&P a HOLD. I would like to see a sharp correction before initiating S&P exposure at a discount. There is clear upside for the second half of 2021, but I would just prefer to maximize the upside from a lower level.

For an ETF that attempts to directly correlate with the performance of the S&P, the SPDR S&P ETF (SPY) is a good option.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Biden’s Stimulus Plan Fails To Push Stocks Higher

Traders Take Some Profits Off The Table At The Start Of The Earnings Season

S&P 500 futures are moving lower in premarket trading as traders take some profits off the table after Biden’s stimulus plan announcement.

Yesterday, U.S. President-elect Joe Biden unveiled a new stimulus plan worth $1.9 trillion which included $1,400 stimulus checks. Early reports suggested that the plan would be worth $1.5 trillion – $2 trillion so Biden’s proposal was in line with traders’ expectations.

Meanwhile, Fed Chair Jerome Powell stated that it was not the time to talk about changing the pace of monthly bond purchasing, refuting rumors about potential cuts to the current asset purchase program.

While the additional stimulus package and the continued bond purchases should be supportive for stocks in the longer run, traders have decided to take some chips off the table at the beginning of the earnings season.

Big Banks Report Earnings

Citigroup, JPMorgan Chase and Wells Fargo have provided their quarterly reports today ahead of the market open, marking the beginning of the earnings season.

All three banks easily beat analyst estimates on earnings as they released some of the reserves they built to deal with the consequences of the coronavirus pandemic. Stimulus programs provided support to banks’ customers which allowed banks to enjoy stronger results.

Interestingly, the market is not satisfied with the reports, and banks’ stocks are losing ground in premarket trading. Financials enjoyed a very strong rally in recent months so traders may be using better-than-expected reports as an opportunity to take profits.

Retail Sales Declined By 0.7% In December

The U.S. has just reported that Retail Sales decreased by 0.7% month-over-month in December while analysts believed that they would remain unchanged compared to November levels. On a year-over-year basis, Retail Sales increased by 2.9%.

The slowdown in Retail Sales is due to the negative impact of the second wave of the virus. However, Retail Sales may soon get a boost when additional stimulus checks are delivered.

Later today, the U.S. will provide Industrial Production and Manufacturing Production reports for December. Industrial Production is expected to grow by 0.5% month-over-month while Manufacturing Production is also projected to increase by 0.5%.

For a look at all of today’s economic events, check out our economic calendar.

US Stock Futures Edge Lower as Biden Unveils Stimulus Plan; Major Banks Set to Kickoff Earnings Season

The major U.S. stock index futures are edging lower in the pre-market session on Friday as investors digested the details of President-elect Joe Biden’s $1.9 trillion stimulus plan revealed Thursday evening local time.

In the early trade, futures tied to the benchmark S&P 500 Index were down 21.75 points. Futures associated with the blue chip Dow Jones Industrial Average were off by nearly 200 points and futures connected with the tech-driven NASDAQ Composite Index traded lower by about 45 points.

Biden’s American Rescue Plan

A quick recap of President-elect Joe Biden’s American Rescue Plan, includes increasing the additional federal unemployment payments to $400 per week and extending them through September, direct payments to many Americans of $1,400, and extending federal moratoriums on evictions and foreclosures through September.

The plan also calls for $350 billion in aid to state and local governments, $70 billion for COVID testing and vaccination programs and raising the federal minimum wage to $15 per hour.

Earnings Season Begins

On Friday, investors will get fresh looks at major banks as Wells Fargo, Citigroup and JPMorgan Chase report their fourth quarter earnings.

JPMorgan kicks off fourth-quarter earnings season for big banks on Friday at about 12:00 GMT, followed by releases from Wells Fargo and Citigroup.

Earnings expectations for the fourth quarter have been on the rise, thanks to climbing interest rates and expectations for solid trading and investment banking results.

The biggest U.S. banks (with the exception of Wells Fargo) all saw per-share earnings estimates jump by at least 8% in the past month, according to Barclays analysts Jason Goldberg.

Thursday US Stock Market Recap

Wall Street closed lower on Thursday after turning down late in the session as reports emerged about U.S. President-elect Joe Biden’s pandemic aid proposal following earlier data that showed a weakening labor market.

Of the 11 major S&P sectors, only four closed higher with economically-sensitive energy, up 3%, showing the biggest percentage gains as oil prices rose. The biggest percentage decliner on the day was the information technology sector.

The domestically-focused small-cap Russell 2000 Index closed up 2%, while the Dow Jones Transports Index ended up 1% after both sectors, which are seen as big beneficiaries of stimulus, scaled all-time highs during the day.

Helping the transport index was a 2.5% rise in shares of Delta Air Lines after Chief Executive Ed Bastian forecast 2021 to be “the year of recovery” after the coronavirus pandemic prompted its first annual loss in 11 years.

The S&P 1500 Airlines Index closed up 3.4%.

The Philadelphia Semiconductor Index also hit a record high with a big boost from Taiwan Semiconductor Manufacturing Co Ltd. The chip manufacturer’s U.S. shares closed up 5% after it announced its best-even quarterly profit and raised revenue and capital spending estimates.

For a look at all of today’s economic events, check out our economic calendar.

Markets Surge Despite Unprecedented Violence at U.S. Capitol

In a news-filled day, the Dow Jones hit an all-time high on Wednesday (Jan. 6), despite unprecedented unrest taking place in Washington D.C.

News Recap

  • The Dow climbed 438 points or 1.4% and briefly rose more than 600 points earlier in the day. The S&P 500 also gained 0.6% and hit an intraday record, while the Nasdaq fell 0.6%. The small-cap Russell 2000 surged by nearly 4%.
  • The day began with investors focused on the Georgia U.S. Senate special election runoff . Democrat Raphael Warnock defeated incumbent Republican Kelly Loeffler, with other Democrat Jon Ossoff announced as the winner over incumbent Republican Sen. David Perdue later in the day.
  • With a Democrat sweep in Georgia, the party now has control of the Senate. Although it is a 50-50 split (with two independents) in the Senate, both Democrats win, they have full control because Vice President-elect Kamala Harris will serve as the tiebreaker vote.
  • Many believe that because President-elect Biden, a Democrat, has a House and Senate under Democrat control, he could more easily pass higher taxes and progressive policies that may hurt the market. On the other hand, others believe that this Democrat sweep could bring into effect a larger and quicker stimulus relief bill.
  • The real news of the day was what happened at the U.S. Capitol building. After President Trump (and his family) led a “Stop the Steal” rally in Washington, D.C. to protest Congress’ certification of Joe Biden as the next president, angry MAGA supporters did the unthinkable and stormed the Capitol.
  • Wednesday (Jan. 6) was the first time since 1814 that the Capitol building was physically breached by hostile actors.
  • The invasion of the Capitol occurred after Vice President Mike Pence rejected President Trump’s calls to block Joe Biden’s election confirmation. Shortly after, the Capitol went into full lockdown.
  • Later that night, the Capitol was secured and Congress reconvened to officially certify Biden as the president. The CBOE Volatility Index (VIX) moved higher due to the unrest at the Capitol.
  • Caterpillar (CAT) surged 5.5%, while big banks such as JPMorgan Chase (JPM) and Bank of America (BAC) gained 4.7% and 6.3%, respectively. Other names and sectors that could be aided by Biden’s agenda rose as well such as the Invesco Solar ETF (TAN) which boomed 8.4%.
  • Tech lagged on the day due to fears of higher taxes and higher stimulus potential. Facebook (FB) and Amazon (AMZN) each fell more than 2%, while Netflix (NFLX) dipped 3.9%.
  • The 10-year Treasury note yield topped 1% for the first time since March.

What a newsworthy day Wednesday (Jan. 6) was. What started as a day focused on Senate runoff elections with the balance of Senate power at stake, ended with President-elect Biden being officially confirmed as the next president. But in between? A mob took over the capitol building! Did you ever think you would read that sentence in your lifetime?

Love him or hate him, President Trump is an eccentric character to put it lightly. Scorned, and still convinced that he won the election, Trump and his bruised ego whipped his supporters into a frenzy during a “Stop the Steal” rally and encouraged them to march towards the Capitol and make their voices heard. Somehow the protest turned into a storming of the Capitol after Vice President Mike Pence refused to overturn the election. Pence was later ushered out of the Senate and the Capitol went into lockdown.

What’s truly shocking here is that the markets still went up! In fact, the Dow hit yet ANOTHER all-time high! Whether you like it or not, this has to give you some sort of faith in the resiliency of capitalism,

The results of the Georgia election can be credited for the market surge.

Although some sectors plummeted due to fears of higher taxes and stricter regulations, with full Democrat control of the Presidency, Senate, and House, there is clarity for one, and expectations of further spending and government stimulus.

Goldman Sachs expects another big stimulus package of around $600 billion . While this could be bad for the national debt and have long-term consequences, in the short-term, it could send the economy heating. Small-cap stocks surged as a result.

I still believe that there will be a short-term tug of war between good news and bad news. Many of these moves upwards or downwards are based on emotion and sentiment, and I believe there could be some serious volatility in the near-term. Although markets on Wednesday (Jan. 6) may have been overly excited from the “Blue Wave” thanks to Georgia, consider this: the Capitol was invaded and the pandemic is still wreaking havoc! Even though the markets gained and the 10-year treasury ticked above 1% for the first time since March, the VIX still rose which means that fear is on the rise.

There was no pullback to end 2020 as I anticipated, but I still believe that markets have overheated in the short-term, and that between now and the end of Q1 2020 a correction could happen.

Carl Icahn seemingly agrees with me, and told CNBC on Monday (Jan. 4) that “in my day I’ve seen a lot of wild rallies with a lot of mispriced stocks, but there is one thing they all have in common. Eventually they hit a wall and go into a major painful correction.”

National Securities’ chief market strategist Art Hogan also believes that we could see a 5%-8% pullback as early as this month.

I believe though that corrections are healthy and could be a good thing. Corrections happen way more often than people realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). I believe we are overdue for one since there has not been one since the lows of March 2020. This is healthy market behavior and could be a very good buying opportunity for what I believe will be a great second half of the year.

While there will certainly be short-term bumps in the road, I love the outlook in the mid-term and long-term once vaccines become more widely available. The pandemic is awful right now, and these new infectious strains out of the U.K. and South Africa are quite concerning. But despite this, I believe the positive manufacturing data released on Tuesday (Jan. 5) is a step in the right direction, especially considering all the restrictions that most countries are living through.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen.

Can Small-caps Own 2021?

Small-caps are the comeback darlings of the week. Although I believed that the Russell 2000’s record-setting run since the start of November was coming to an end, it has rallied over 5% in the last two trading days. Thanks to a Democrat sweep in Georgia and hopes of further economic stimulus, small-cap stocks have climbed back towards record highs.

I love small-cap stocks in the long-term, especially as the world reopens. A Democrat-dominated Congress could help these stocks too. But I believe that in the short-term, the index, by any measurement, has simply overheated. Before Jan. 4, the RSI for the I WM Russell 2000 ETF was at an astronomical 74.54. I called a pullback happening in the short-term due to this RSI, and it happened. Well now the RSI is back above 72, and I believe that a bigger correction in the near-term could be imminent.

Stocks simply just don’t always go up in a straight line, and that’s what the Russell 2000 has essentially been between November and December.

What this also comes down to is that small-caps are more sensitive to the news – good or bad. I believe that vaccine gains have possibly been baked in by now. There could be another near-term pop due to hopes of further stimulus, but I believe that it’s likely possible that small-caps in the near-term could trade sideways before an eventual larger pullback.

I truthfully hope small-caps decline a minimum of 10% before jumping back in for long-term buying opportunities.

SELL and take Wednesday’s (Jan. 6) profits if you can- but do not fully exit positions .

If there is a pullback, this is a STRONG BUY for the long-term recovery.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Dow, S&P Dip Again on Lockdown Fears

Stocks closed largely down on Monday (Dec. 14) as fears of stricter lockdowns outweighed vaccine optimism.

News Recap

  • The Dow Jones closed lower by 185 points, or 0.5% after earlier rising by as much as 200 points and hitting a record intraday high. The S&P 500 also declined by 0.4%, while the Nasdaq outperformed and gained 0.5%. The small-cap Russell 2000 once again rose, gaining 0.26%.
  • Although the day started with optimism as Pfizer began the rollout of its vaccine, comments from New York City Mayor Bill De Blasio put pressure on the Dow and S&P, and spooked investors about further lockdowns. De Blasio warned earlier in the day that New York could experience a “full shutdown” soon, due to infection levels not seen since May.
  • There is some cautious optimism that some sort of stimulus could be passed before the end of the year, however, congress remains deeply divided on several fronts. Namely, these partisan divides stem from liability protections for businesses, the scope of state and local aid, and weekly unemployment benefits.
  • We have reached the deadliest weeks of the COVID-19 pandemic. More than 300,000 total COVID-related deaths have now been confirmed in the U.S., with over 16 million confirmed cases.
  • After the U.S. FDA. officially cleared Pfizer (PFE) and BioNTech’s (BNTX) vaccine last Friday (Dec. 11), the roll-out officially began on Monday (Dec. 14). The first doses were administered to healthcare workers and nursing home staffers. Approximately 2.9 million doses were shipped to 636 sites across the country. Pfizer also said it would roll out a second batch of 2.9 million doses shortly after this initial batch. The FDA is also slated to publish its assessment on Moderna’s vaccine this week, before mass deployment.
  • Despite the start of the vaccine roll-out, shares of Pfizer and BioNTech both sharply fell 4.65 and 14.95%, respectively.
  • Companies dependent on an economic reopening lagged the “stay-at-home” and tech winners from early on in the pandemic. United Airlines (UAL) dropped 3.4% and Chevron (CVX) fell 3.26% compared to Netflix (NFLX) which gained over 3.8%, and Amazon (AMZN) which popped more than 1%.
  • Tesla (TSLA) also surged 4.90% as investors anticipate its inclusion into the S&P 500 after this week.

While the short-term may see some pain and/or mixed sentiment, the mid-term and long-term optimism is certainly very real. Overall, the general consensus between market strategists is to look past short-term painful realities and focus more on the longer-term – a world where COVID-19 is expected to be a thing of the past and we are back to normal.

According to Robert Dye, Comerica Bank Chief Economist : “I am pretty bullish on the second half of next year, but the trouble is we have to get there…As we all know, we’re facing a lot of near-term risks. But I think when we get into the second half of next year, we get the vaccine behind us, we’ve got a lot of consumer optimism, business optimism coming up and a huge amount of pent-up demand to spend out with very low interest rates.”

Other Wall Street strategists are bullish about 2021 as well. According to a JPMorgan note to clients released on Wednesday (Dec. 9), a widely available vaccine will lift stocks to new highs in 2021:

“Equities are facing one of the best backdrops for sustained gains next year,” JPMorgan said. “We expect markets to be driven by recovery from the COVID-19 crisis at the back of highly effective vaccines and continued extraordinary monetary and fiscal support.”

JPMorgan’s S&P 500 target for 2021 is 4,400. This implies a nearly 20% gain.

On the other hand, for the rest of 2020, and maybe early on into 2021, markets will wrestle with the negative reality on the ground and optimism for an economic rebound.

Additionally, the rally since election week invokes concerns of overheating with bad fundamentals. Commerce Street Capital CEO Dory Wiley advised caution in this overheated market. He pointed to 90% of stocks on the NYSE trading above their 200-day moving average as an indication that valuations might be stretched:

“Timing the market is not always well-advised and paring back can miss out on some gains the next two months, but after such good returns in clearly a terrible fundamentals year, I think taking some profits and moving to cash, not bonds, makes some sense here,” he said.

In the short-term, there will be some optimistic and pessimistic days. Some days, like Monday (Dec. 14), will reflect what the broader “pandemic” trend has been – cyclical and recovery stocks lagging, and tech and “stay-at-home” stocks leading. On other days (and in my opinion this will be most trading days), markets will trade largely mixed, sideways, and reflect the uncertainty. However, if a stimulus deal passes before the end of the year, it could mean very good things for short-term market gains. It is possible that there could be a minor compromise reached before the end of the year, however, a more large-scale comprehensive package may not be agreed to until 2021.

In the mid-term and long-term, there is certainly a light at the end of the tunnel. Once this pandemic is finally brought under control and vaccines are mass deployed, volatility will stabilize, and optimism and relief will permeate the markets. Stocks especially dependent on a rapid recovery and reopening, such as small-caps, should thrive.

Due to this tug of war between sentiments, it is truly hard to say with conviction whether another crash or bear market will come.

Therefore, to sum it up:

While there is long-term optimism, there is short-term pessimism. A short-term correction is very possible. But it is hard to say with conviction that a big correction will happen.

On Pessimistic Days, Tech is Crucial…But There are Concerns

Tech shares led the markets on Monday (Dec. 14) and reflected a return of the “stay-at-home” trade – possibly due to Mayor De Blasio’s “shut down” comments about New York City. However, I believe these are short-term moves rather than a return of long-term trends. I do not believe there is “market nostalgia” for the way the indices traded largely from April through the end of October.

Although I believe tech exposure is important during pessimistic trading days, I have many concerns about tech valuations and their astoundingly inflated levels. Last week’s IPOs of DoorDash (DASH) and AirBnB (ABNB) reflect this and invoke traumatic memories of the dotcom bubble era. I believe that more pullbacks along the lines of last Wednesday (Dec. 9) are inevitably coming in the short-term and would make me feel far more confident about initiating tech positions at lower valuations for the long-term.

After exceeding an overbought RSI level of 70, the pullback last Wednesday (Dec. 9th) brought it back down to a healthier level. While its current RSI of 63.30 is still pretty high, it is not quite overbought and still a hold. But monitor this . If the index goes on another bull-run and exceeds 70, then you may want to consider selling some. While an overbought RSI does not automatically mean a trend reversal, it does not help the overvaluation of the market and possible correction. The NASDAQ’s pullback last Wednesday (Dec. 9), after it exceeded a 70 RSI, reflects that.

The decline in volume since the start of the month is also quite concerning for volatility purposes. Low volume, especially a declining trend, means that there are fewer shares trading. Lower volume also means less liquidity across the index, and an increase in stock price volatility.

On pessimistic days, like Monday (Dec. 14), having NASDAQ exposure is crucial because of all the “stay-at-home” stocks that trade on the index. However, positive vaccine news always induces the risk of downward pressure on tech names – both on and off the NASDAQ. But what concerns me most are sharp sell-offs due to overheating and mania. Don’t ever let anyone tell you “this time is different” if fears of the dot-com bubble are discussed. History repeats itself – especially in markets.

It is very hard to say with conviction to sell your tech shares though. A further correction would not shock me in the least. But again, there is so much unpredictability right now, and truly anything could happen. The one thing I can confidently say though, is that if the RSI exceeds 70 again, then you should consider selling. For now, however, the NASDAQ stays a HOLD .

For an ETF that attempts to directly correlate with the performance of the NASDAQ, the Invesco QQQ ETF (QQQ) is an excellent option.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Markets End Week (Dec. 11) in the Red, Uncertain Short-term Sentiment

What Happened Last Week:

  • Markets throughout the week continued wrestling with short-term pain and long-term optimism.
  • After fresh record highs were reached the week before, the major indices ended the week lower due to a multitude of headwinds. Between Monday December 7th and Friday’s close December 11th, the Dow closed down 0.08%, the S&P closed down 0.77%, and the NASDAQ closed down -1.13%. The small-cap Russell 2000, however, notched another weekly gain, and closed up about 1.00%.
  • Sentiment is mixed, and the rally since election week invokes concerns of overheating, with bad fundamentals. Commerce Street Capital CEO, Dory Wiley , advised caution. He pointed to 90% of stocks on the NYSE trading above their 200-day moving average as an indication that valuations might be stretched. “Timing the market is not always well-advised and paring back can miss out on some gains the next two months, but after such good returns in clearly a terrible fundamentals year, I think taking some profits and moving to cash, not bonds, makes some sense here,” he said.
  • Judging by the jobless claims report which came in on Thursday (Dec. 10), the jobs recovery appears to have stalled. Weekly jobless claims increased by 853,000 last week versus the estimate of 730,000, representing a sharp increase from the 716,000 figure a week ago. This was also the highest number since September 19.
  • Although the Senate unanimously passed a temporary spending bill to avoid a government shutdown and buy more time to negotiate a stimulus package before the end of the year, stimulus negotiations between Republicans and Democrats continue to drag-on and weigh on sentiment.
  • The week before brought some initial signs of stimulus progress, however, Democrats and Republicans still have some critical differences. Much of the division stems from liability protections for businesses, the scope of state and local aid, and weekly unemployment benefits.
  • It is possible that there could be a minor compromise reached before the end of the year, but a larger-scale comprehensive package may not be agreed upon until 2021. The longer these talks continue, the stronger the headwinds will be for stocks, and the more damaging it will be for the U.S. economy.
  • DoorDash (DASH) and AirBnB (ABNB) both made their public debuts last week to much fanfare. Airbnb spiked 115% when it began trading publicly for the first time on Thursday (Dec. 10) while DoorDash closed 86% higher in its Wednesday debut (Dec. 9). However, according to Paul Schatz , president and chief investment officer of Heritage Capital, these debut rallies may indicate that the IPO market is getting ahead of itself, and invoke fears of “euphoria and greed” last seen in the market during the dot-com bubble.
  • The pandemic continues exceeding the previous records. After hitting 3,000 deaths a day for several days last week, Friday’s (Dec. 11) tallies, according to NBC News , showed 2,890 deaths and 226,024 new cases.
  • In the last week the U.S. has averaged 211,324 cases and 2,381 deaths per day, which is quite an increase from 168,493 cases and 1,419 deaths four weeks ago.
  • Not all is bad, though. The vaccine(s) remain a positive tailwind. After the U.K. became the first country in the world to approve the usage of Pfizer and BioNTech’s vaccine the week before, the U.S. F.D.A. ended the week by officially clearing the vaccine for emergency use. Millions of doses are expected to be shipped right away.
  • Since the vaccine was first announced on November 9, a broadening of the market’s rally began, largely led by small-cap stocks, and cyclical value stocks dependent on an economic recovery.
  • Consumer sentiment posted a surprising increase in December due to vaccine optimism. Although the economic recovery may stutter in the near term, a vaccine changes everything for 2021’s outlook. Corporate profits, for example, are forecast to grow more than 20% in 2021 .
  • According to Robert Dye, Comerica Bank Chief Economist , he is: “pretty bullish on the second half of next year, but the trouble is we have to get there…As we all know, we’re facing a lot of near-term risks. But I think when we get into the second half of next year, we get the vaccine behind us, we’ve got a lot of consumer optimism, business optimism coming up and a huge amount of pent-up demand to spend out with very low interest rates.”
  • According to a JPMorgan note to clients released on Wednesday (Dec. 9), a widely available vaccine will lift stocks to new highs in 2021: “Equities are facing one of the best backdrops for sustained gains next year…We expect markets to be driven by recovery from the COVID-19 crisis at the back of highly effective vaccines and continued extraordinary monetary and fiscal support.”
  • JPMorgan’s S&P 500 target for 2021 is 4,400. This implies a nearly 20% gain from where the index closed on Wednesday (Dec. 9).

In the short-term, there will be some optimistic days and pessimistic days. Other days, and in my opinion, which will be most trading days, markets will trade largely mixed, sideways, and reflect the uncertainty. However, if a stimulus deal passes before the end of the year, it could mean very good things for short-term market gains. It is possible that there could be a minor compromise reached before the end of the year, however, a more large-scale comprehensive package may not be agreed to until 2021.

In the mid-term and long-term, there is certainly a light at the end of the tunnel. Once this pandemic is finally brought under control and vaccines are mass deployed, volatility will stabilize, and optimism and relief will permeate the markets. Stocks especially dependent on a rapid recovery and reopening, such as small-caps, should thrive.

Due to this tug of war between sentiments, it is truly hard to say with conviction whether another crash or bear market will come.

Therefore, to sum it up:

While there is long-term optimism, there is short-term pessimism. A short-term correction is very possible. But it is hard to say with conviction that a big correction will happen.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

3 Bank Stocks Trading Back Above Their 200 Moving Average

Bank stocks came under heavy selling pressure earlier this year as the coronavirus pandemic upended economic activity, causing banks to significantly beef up their bad debt provisions. However, the group has almost doubled the broader market’s performance over the last month as investors bet that a vaccinated population and ongoing levels of record stimulus spending will spark a strong recovery in 2021.

Below, we look at three large-cap banking stocks that each trade above their 200-day simple moving average (SMA).

JPMorgan Chase & Co.

With a market value upwards of $370 billion and issuing a 3.01% dividend yield, New York-based JPMorgan Chase & Co. (JPM) operates as a financial services company through four segments: consumer & community banking, corporate & investment bank, commercial banking, and asset & wealth management.

The financial giant eased concerns of ongoing loan defaults during its latest quarterly earnings release, disclosing that it had reduced provision for credit costs by $569 million.The bank had added more than $15 billion to loan loss reserves in the first half of 2020. Technical analysis shows price continuing higher after the 50-day SMA crossed above the 200-day SMA, marking the start of a new uptrend. Further bullish momentum may see the stock retest its 52-week high at $141.10.

Citigroup Inc.

Citigroup Inc. (C) provides diversified financial services and products in over 100 countries to consumers, corporations, governments, and institutions. Like its competitors, the bank slashed its loan loss provisions in the third quarter, with net credit losses declining to $1.9 billion from $2.2 billion in the previous three-month period. Moreover, the bank’s CEO Michael Corbat told investors that credit costs have stabilized and deposits continue to increase, per CNBC.

The stock has a market capitalization of $119 billion and offers a 3.68% dividend yield. From a technical standpoint, the price trades above both a multi-month downtrend line and the 200-day SMA, which may see the bulls test the top of a previous trading range at $73.

Wells Fargo & Company

Wells Fargo & Company (WFC) serves its customers through three business divisions: community banking, wholesale banking, and wealth- and investment management. Although the 168-year-old bank reported a 19% year-over-year (YoY) decline in Q3 net interest income, it set aside just $769 million for credit losses – down substantially from the $9.5 billion put aside in the second quarter.

The company has a market value of $119.36 billion and pays investors a 1.43% dividend yield. Chart wise, since hitting its 2020 low in late October, the price has gained nearly 40% to now trade back above the 200-day SMA. Ongoing buying could see the stock test major resistance levels at $34 and $43.

For a look at today’s earnings schedule, check out our earnings calendar.

JPMorgan Stock Set for Big Earnings-Day Move

Already, the options markets are pointing to a one-day move of 3.14 percent, either way, following their Q3 earnings release. If such a price swing were to transpire, that would be larger than the average 1.9 percent absolute move for the past eight reports!

JPMorgan’s performance will also be closely scrutinised because it may give investors an idea about where the world’s largest economy is headed. As the US economic recovery shows signs of plateauing, so too have the share prices of its biggest lender, with JPMorgan stocks largely sticking to a sideways range so far in the second half of this year.

Saving for a rainy day?

During JPMorgan’s announcement, investors will be eyeing tell-tale signs surrounding its credit quality.

Recall that, in Q2, JPMorgan had already set aside US$10.5 billion for loan loss provisions, which is how much money the bank is setting aside in anticipation of customers not being able to service their loans in the future.

Q3 was a time when stimulus checks made their way into American households, as the broader economy enjoyed unprecedented amounts of monetary and fiscal stimulus. The US unemployment rate saw a significant decline during the past three months, coming in at 7.9 percent in September, which is significantly lower than the 14.7 percent registered in April.

Still, last month’s unemployment rate is still roughly double compared to pre-pandemic levels. Weekly jobless claims, both initial and continuous, remain stubbornly high at around 800,000 and 11 million respectively. Such figures underscore the sheer need for more financial support for American households and businesses.

Yet, considering the dire economic outlook, the fiscal taps have dried up, with the next round of fiscal stimulus left in limbo by political brinksmanship between the White House and Democrats.

With all that considered, should JPMorgan see it fit to add more loan loss provisions, that could signal that they’re bracing for more defaults in the future, which could then send a risk-off signal to broader markets.

Earnings recovery to begin in Q3?

Overall, market participants would want to know whether the major US banks that will be announcing their results this week can set the tone for the expected earnings recovery over the coming quarters.

Recall that in Q2, S&P 500 companies saw an earnings drop of over 30 percent. It was ugly, from a fundamental perspective, yet traders pushed the benchmark stock index upwards with apparently nary a care in the world.

Q3 estimates call for a 21.7 percent drop in earnings, followed by a 13.7 percent decline in Q4, which could then put Wall Street back on the path to earnings growth in 2021. However, should the Q3 earnings disappoint, that could set back such projections, prompting fundamentally-driven investors into giving S&P 500 companies a longer runway to stage their earnings comeback.

Of course, JPMorgan’s economic outlook and forward guidance could well set the tone for equity markets during this earnings season. However, it remains to be seen how much market participants will sway to the reporting season’s tune, or would they keep faith that the next round of US fiscal stimulus is imminent while blissfully ignoring any warning signs out of Wall Street.

Written on 10/13/20 04:00 GMT by Han Tan, Market Analyst at FXTM


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JPMorgan Chase Kicks Off Third Quarter Earnings Season

Dow component JP Morgan Chase and Co. (JPM) kicks off third quarter earnings season on Tuesday, highlighting a hopeful quarter in which economic activity ticked higher around the world. Wall Street analysts now expect the banking giant to report $2.24 earnings-per-share (EPS) on $28.12 billion in Q3 2020 revenue.  That would mark a 15% decline in profits compared to 2019, reflecting pandemic headwinds that could persist well into next year.

Growing Bank Sector Headwinds

September’s blockbuster money laundering report implicated JPMorgan, alleging more than $500 billon in suspicious transactions in the last 20 years. The matter has been turned over to the Department of Justice and the Treasury Department’s inspector general. Their potential involvement could impact sentiment in coming quarters because it’s the largest U.S. bank and a Democratic administration could take a more aggressive stance than the current White House occupant.

In addition to the pandemic and its dampening effect on economic activity, commercial banks may have to deal with long-term ultra-low interest rates. Federal Reserve Chairman Jerome Powell recently outlined a dovish new formula that has the potential to depress industry profits for the next two to three years, at a minimum. Of course, rates have already fallen precipitously, dropping the banking sector near the bottom of the bull market performance list.

Wall Street And Technical Outlook

Wall Street consensus on JPMorgan is generally upbeat, with a ‘Moderate Buy’ rating based upon 7 ‘Buy’ and 3 ‘Hold’ recommendations. One analyst now recommends that shareholders close positions and move to the sidelines. Price targets currently range from a low of $80 to a street-high $122 while the stock closed Friday’s session about $10 below the median $111 target. This placement perfectly matches sideways price action in the second and third quarters.

The stock ended several years of market leadership in the first quarter, descending from an all-time high to a three-year low. The downdraft crushed 200-day moving average support on high volume while three attempts to mount new resistance have failed. A mild winter and an effective vaccine should lift JPMorgan above this formidable barrier but current shareholders should keep one finger on the exit button because a trip into the March low is also possible.

For a look at all of today’s economic events, check out our economic calendar.

JPMorgan Chase Struggling In Adverse Economic Environment

Dow component and financial giant JPMorgan Chase and Co. (JPM) beat Q2 2020 profit estimates by $0.15 last week, reporting $1.43 earnings-per-share on $33.8 billion in revenues. Revenues rose a healthy 14.7% year-over-year but provisions for credit losses lifted to $10.5 billion, offsetting otherwise strong metrics during a period in which many business segments benefited from post-shutdown reopening efforts.

JPMorgan Chase Rising Credit Losses

U.S. banks have performed poorly so far in 2020, with the S&P Banks Select Industry Index dropping more than 34%, despite bouncing off a multiyear low in March. Twin headwinds of plummeting interest rates and slumping business activity have underpinned this weak performance, which may continue well into 2021. The recent surge in U.S. COVID-19 cases has added a third roadblock, renewing fears of a long and deep recession.

JP Morgan Chase CEO Jamie Dimon stressed the challenging environment in the earnings release, admitting “we still face much uncertainty regarding the future path of the economy. However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm. We ended the quarter with massive loss-absorbing capacity, over $34 billion of credit reserves and total liquidity resources of $1.5 trillion, on top of $191 billion of CET1 capital, with significant earnings power that would allow us to absorb even more credit reserves.”

Wall Street And Technical Outlook

Wall Street consensus currently rates the stock as a ‘Moderate Buy’, underpinned by 9 ‘Buy’ and 5 ‘Hold’ recommendations. No analysts are recommending that shareholders sell their positions at this time. This optimism seems unwarranted, given the banking sector’s laggard behavior this year, suggesting that downgrades may increase in coming months. Price targets range from a low of $97 to a street high $122 while the stock is now trading just $3 above the low target.

JP Morgan Chase has outperformed its peers since 2009, breaking out in October 2019 and posting an all-time high above 140 at the start of 2020. It then sold off with world markets, dropping to a 3-year low in the 70s in March. Price action has been crisscrossing the 200-week moving average for almost 5 months now, in a neutral position that’s unlikely to stoke long-term buying interest. Ominously, accumulation has been trending lower since the first quarter of 2018, increasing risk that committed sellers will eventually break the March low.

Dixons and Burberry Slide, as ASOS Outperforms, US Banks Remain in Focus

Investors also appeared to be unconcerned that the vaccine prompted some side effects in these early stage trials, however Asia markets were slightly more mixed with the Bank of Japan leaving rates unchanged.

The Nikkei225, and Korean markets pushed higher, however Chinese and Hong Kong markets slid back in the wake of President Trump signing the legislation revoking Hong Kong’s special trade status.

Markets here in Europe have taken their cues from the late rally in the US, opening higher as the tug of war between the bulls and the bears continues with respect to the next significant move.

The DAX is once again trading back close to the highs we saw in early June, while the FTSE100 is once again back above the 6,200 level, having been in a fairly broad 6,000/6,400 range for the past four weeks.

Luxury fashion retailer Burberry has had to contend with a number of challenges over the last 12 months, from the disruption of its Hong Kong business as well as the fallout from weaker Chinese demand and the spread of coronavirus. In May the company reported full-year numbers that saw operating profits slide 57% to £189m Revenues were hit hard by the costs of the disruptions in Hong Kong as well as the closure of various stores due to coronavirus pushing their impairments up to £245m.

This morning’s Q1 numbers are slightly better, with Q1 sales declining 45% while Q2 sales are expected to fall by between 15% and 20%. Retail revenue almost halved from £498m to £257m. This is a little disappointing but not altogether surprising, and given recent news of further restrictions in Hong Kong, could be viewed as being on the optimistic side, which probably helps explain why the shares are lower in early trade.

The improvement in Q1 is mainly down to stores in mainland China and Korea re-opening, however given the recent challenges posed by coronavirus, management appear to be looking towards making some savings in the way the business is run by introducing some changes, taking a restructuring charge of £45m.

Some of these changes, as well as some office space rationalisation could mean a reduction in headcount at its London Head Office, delivering annual savings of £55m.

Electrical retailer Dixons Carphone reported its latest full year numbers, which saw revenues come in around 1% above expectations, at £10.17bn, and down 3% on 2019 levels.

The company posted a loss after tax of £163m, largely down to the impact of Covid-19, which impacted the UK and Ireland mobile operations causing revenues to fall 20%. This was primarily down to the closure of stores at the end of March. All other areas of the business saw revenues increase over the period. While losses have reduced, and the outlook set to remain uncertain, the shares have slipped sharply in early trade, however all other areas of the business performed quite well, which suggests that investors might be overreacting to the losses in the mobile division, which Dixons is pulling away from in any case.

Fast fashion retailer ASOS latest update for the four months to the end of June, has seen the shares push back up towards this year’s high on expectations that profits are likely to be at the upper end of forecasts. Group sales saw an increase of 10% to just over £1bn for the period, with the customer base seeing a rise of 16%. Most of the sales growth came in its EU market, with a rise in sales of 22%. Gross margins were lower to the tune of 70bps, a trend that seems likely to continue given the current environment.

In a sign that fashion companies are becoming increasingly nervous about their brand reputation, ASOS also announced that they were axing contracts to suppliers who were found to be in breach health and safety, as well as workers’ rights regulations.

Homeware retailer Dunelm Group was one of the few success stories in UK retail last year, with the company posting strong operating profits and paying a special dividend. We are unlikely to see anything like that this year. The company closed all of its stores on the 24th March, furloughing employees under the governments job retention scheme, at a cost of £14.5m, and has slowly been reopening the business since late April, when it reopened its on line operations. At the time it said it had enough capital to withstand store closures of up to six months.

Fortunately, that hasn’t come to pass, and the company never had to draw on its £175m financing facilities. All of its stores have now re-opened, with one-way systems and strict social distancing guidelines in place. The in-store coffee shops are expected to reopen by the end of July, while the share price has managed to recover most of its losses for this year. This morning’s Q4 update, has seen total sales for the quarter decline by 28.6%. Online sales more than made up for that with a rise of 105.6% year on year, with the month of May seeing a 141% increase.

In terms of the full year numbers, sales were only down 3.9% on the prior year at £1.06bn, with profits before tax expected to be in the range of £105m to £110m, down from £125.9m the previous year, which given the disruption over the last few months is a pretty decent performance.

In terms of the future, costs are expected to increase to the region of £150k per week, however given how badly coronavirus has affected other retailers, Dunelm has ridden out the storm remarkably well.

The pound is holding up well after a weak session yesterday with the latest inflation numbers showing a modest uptick in June to 0.6%, with core prices rising 1.4%, from 1.2% in May.

Crude oil prices are a touch higher this morning ahead of an online meeting of OPEC+ monitoring committee which could decide whether the group is inclined to maintain the production cuts currently in place, which are due to expire at the end of this month.

US markets look set to open higher, building on the momentum seen in the leadup to last nights close, with the focus once again back on the latest bank earnings numbers for Q2.

Having seen JPMorgan, Citigroup and Wells Fargo collectively set aside another $28bn in respect of non-performing loans yesterday, that number is set to increase further when the likes of Bank of America, Goldman Sachs and Bank of New York Mellon report their latest Q2 numbers later today.

In Q1 US banks set aside $25bn in respect of credit provisions, and the key takeaway from yesterday was that while these banks trading divisions were doing well, their retail operations were starting to creak alarmingly. This is why Wells Fargo suffered its worst year since 2008, given that it lacks an investment banking arm, and could well see the bank embark on some significant cost saving measures over the course of the next few months.

The difference between Wells Fargo and JPMorgan’s numbers couldn’t have been starker, with Wall Street trading operations doing well, while Main Street painted a picture of creaking consumer finances.

Dow Jones is expected to open 190 points higher at 26,832

S&P500 is expected to open 15 points higher at 3,212

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

U.S. Stocks Mixed As Traders Focus On Banks’ Earnings

The Market Ignores New Virus Containment Measures And Continued Deterioration In U.S. – China Relations

S&P 500 futures are mixed in premarket trading despite California’s decision to introduce new virus containment measures and additional deterioration in U.S. – China relations.

Facing a surge in the number of new coronavirus cases, California decided to shut bars and close indoor dining. In addition, the hardest-hit counties will have to close gyms, hair salons and churches.

Yesterday, this decision led to a massive reversal of S&P 500 during the trading session but this sell-off did not get any continuation.

Meanwhile, U.S. – China relations got a fresh blow after U.S. rejected China’s claims in the South China Sea, calling them “unlawful”. At this point, the market continues to ignore risks of a new round of U.S. – China trade war.

Citigroup, JPMorgan and Wells Fargo Open The Earnings Season For Banks

Banks’ earnings are the main reason for market optimism this morning. Citigroup, JPMorgan and Wells Fargo have just provided their second-quarter reports.

JPMorgan reported earnings of $1.38 per share and increased its reserves by $8.81 billion. Analysts expected earnings of $1.23 per share.

Citigroup’s earnings were much better than expected at $0.50 per share compared to analyst consensus of $0.27 per share. Not surprisingly, Citigroup increased its reserves by $5.6 billion.

Wells Fargo reported a loss of $0.66 per share which was worse than the analyst consensus which called for a loss of $0.10 per share. The bank had to increase its reserves by $8.4 billion. In addition, Wells Fargo decided to cut its dividend by as much as 80%.

Citigroup and JPMorgan shares are up in premarket trading while Wells Fargo is under pressure which is not surprising given the massive dividend cut. The huge increase in reserves was expected given the current market situation. In my opinion, it’s a good start for the earnings season as stronger banks easily exceeded analyst expectations.

Inflation Rate Gets Back To The Positive Territory

The U.S. has just provided Inflation Rate and Core Inflation Rate reports for June. Inflation Rate increased by 0.6% month-over month in June compared to a decrease of 0.1% in May. On a year-over-year basis, Inflation Rate was also 0.6%.

Core Inflation Rate grew by 0.2% month-over-month. On a year-over-year basis, Core Inflation Rate increased by 1.2%.

Both Inflation Rate and Core Inflation Rate were a bit higher than expected which shows that customer activity has likely started to rebound in June.

For a look at all of today’s economic events, check out our economic calendar.

Will US Banks’ Share Prices Suffer as Covid-19 Takes its Toll?

It’s a bumper week for US bank results, with Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo all revealing how they fared in Q2. These results are likely to be closely scrutinised for further evidence that US banking chiefs are concerned about setting aside higher provisions in respect of large-scale loan losses, after the $25bn set aside at the end of Q1.

The impact on the US, UK and European banking sectors has been fairly similar in terms of share price performance, with banks a serial drag on all of the major indices. The S&P 500 is now back to slightly negative year-to-date, while the CMC Markets US Banks share basket is down 35%.

CMC bank baskets sector comparison (2020)

Source: CMC Markets

One shouldn’t read too much into this similar performance given that US banks have come down from a much higher baseline. But the declines do highlight where the pressures lie when it comes to the weak points in the global economy, as rising unemployment puts upward pressure on possible loan default rates.

This higher baseline for US banks came about in the aftermath of the financial crisis, when US authorities took much more decisive action to shore up their banking sector in the wake of the collapse of Lehman.

The thought process as the crisis was unfolding was that capitalism needed to take its course in allowing both Bear Stearns, as well as Lehman, to collapse in order to make the point that no one institution was too big to fail. It’s certainly a sound premise, and in most cases allowing a failing business to fold wouldn’t have too many long-term consequences.

Unfortunately, due to the complex nature of some the financial instruments designed by bankers and portfolio managers, it was a premise that was destined to fail. Its failure still scars policymakers’ reaction function when they make policy decisions today.

It soon became apparent in the fall of Lehman, that allowing one big player to fail caused widespread panic in the viability of almost every other financial institution. Like pulling one Jenga block out of a tower of financial complexity, it undermined the stability of the entire construct.

Some institutions continue to be too big to fail, as well as being too big to bail out, meaning that global policymakers only have the tools of annual stress tests to ensure that these institutions have the necessary capital buffers to withstand a huge economic shock.

Since those turbulent times when US authorities forced all US banks to clean up their balance sheets, by insisting they took troubled asset relief program (TARP) money, whether they needed to or not, the US banking sector has managed to put aside most of its problems from the financial crisis.

As can be seen from the graph below, the outperformance in US banks has been remarkable. However a lot of these gains were juiced by share buybacks, as well as the tailwind of a normalised monetary policy from the US Federal Reserve from 2016 onwards, and a US economic recovery that peaked at the beginning of 2019.

US banks’ share price performance

Source: CMC Markets

It should also be noted that while Bank of America has been by far the largest winner, it was also one of the biggest losers in 2008, due to its disastrous decision to purchase Countrywide. The deal prompted the Bank of America share price to plunge from levels above $50 a share to as low as $3 a share, costing the bank billions in losses, fines and aggravation.

UK and European banks shares in similar plight

UK authorities have also gone some way to improving the resilience of its own banking sector, though unlike the US, we do still have one big UK bank in the hands of the taxpayer, in the form of Royal Bank of Scotland. Others have been left to fend for the scraps in fairly low-margin banking services of mortgages, loans and credit cards.

UK banks’ trading operations were also curtailed sharply in the wake of the financial crisis, in the mistaken belief that it was so-called ‘casino’ investment banking that caused the crisis, rather than the financial ‘jiggery-pokery’ of the packaging and repackaging of CDOs of mortgages and other risky debt.

In Europe, authorities have made even fewer strides in implementing the necessary processes to improve resilience. The end result is that the banking sector in the euro area is sitting on very unstable foundations, with trillions of euros of non-performing loans, and several banks in the region just one large economic shock away from a possible collapse.

The current state of the banking sector

While we’ve seen equity markets remain fairly resilient in the face of the massive disruption caused by the coronavirus pandemic, the same cannot be said for the banking sector, which has seen its share prices sink this year.

Nowhere is that better illustrated than through our banking share baskets over the last 15 months.

Banking sector vs US SPX 500 comparison

Source: CMC Markets

Despite their fairly lofty valuations, the share price losses for US banks have seen a much better recovery from the March lows than has been the case for its UK and European counterparts.

This has probably been as a result of recent optimism over the rebound in US economic data, although the recovery also needs to be set into the context of the wider picture that US banks are well above their post-financial-crisis lows, whereas their European and UK counterparts are not.

Another reason for this outperformance on the part of US banks (black line) is they still, just about, operate in a largely positive interest rate environment, and also have large fixed income and trading operations, which are able to supplement the tighter margins of general retail banking. They have also taken more aggressive steps to bolster their balance sheets against significant levels of loan defaults.

In Q1, JPMorgan set aside $8bn in respect of loan loss provisions in its latest numbers, while Wells Fargo set aside $4bn. Bank of America has set aside $3.6bn, while Citigroup has set aside an extra $5bn. Goldman Sachs also had a difficult first quarter, largely down to setting aside $1bn to offset losses on debt and equity investments.

With New York at the epicentre of the early coronavirus outbreak, Bank of New York Mellon’s loan loss provision also saw a big jump, up from $7m a year ago to $169m. Morgan Stanley completed the pain train for US banks, with loan loss provisions of $388m for Q1, bringing the total to around $25bn.

What to look out for as US banks report Q2 figures

As we look ahead to the US banks Q2 earnings numbers, investors will be looking to see whether these key US bellwethers set aside further provisions in the face of the big spikes seen in unemployment, and the rising number of Covid-19 cases across the country.

Another plus point for US banks will be the fees they received for processing the paycheck protection program for US businesses. It’s being estimated that US banks that are part of the scheme have made up to $24bn in fees, despite bearing none of the risk in passing the funds on from the small business administration.

In the aftermath of the lockdowns imposed on the various economies across Europe, the Eurostoxx banking index hit a record low of 48.15, breaking below its previous record low of 72.00 set in 2012 at the height of the eurozone crisis. It’s notable that UK banks have also underperformed, though it shouldn’t be given the Bank of England’s refusal to rule out negative rates, which has helped push down and flatten the yield curve further.

This refusal further suppressed UK gilt yields, pushing both the two-year and five-year yield into negative territory, and eroding the ability of banks to generate a return in their everyday retail operations.

It’s becoming slowly understood that negative rates have the capacity to do enormous damage to not only a bank’s overall probability, but there is also little evidence that they can stimulate demand. If they did, Japan, Switzerland and Europe would be booming, which isn’t the case.

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

U.S. Stocks Set To Open Higher As Traders Increase Their Bets On Economic Recovery

The Earnings Season Begins

Finally, the stock market optimism will be tested by quarterly earnings data from U.S. – listed companies. This week marks the real start of the earnings season.

The most interesting reports will come from banks whose stocks were hit hard by the coronavirus pandemic. This week, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley will provide their second-quarter results.

Most likely, the market will focus on the banks’ earnings outlook since the second-quarter is expected to look bad.  For example, Citigroup’s earnings are expected to decline from $1.06 per share in the first quarter to just $0.27 per share in the second quarter.

While traders wait for the upcoming earnings reports, S&P 500 futures are gaining ground in the premarket trading session, and the U.S. stock market is set to continue its upside trend.

China Announces Sanctions Against U.S. Senators

In the previous week, the U.S. has sanctioned high-ranked Chinese officials for alleged human rights abuse against Uighur minority in China. China promised to introduce counter-measures but did not provide any details about such measures at that time.

Today, these counter-measures were revealed. China decided to announce sanctions against U.S. Senators Marco Rubio and Ted Cruz. U.S. Representative Chris Smith as well as U.S. Congressional-Executive Commission on China were also put on sanctions list.

This move marks another increase in U.S. – China tensions which have unnerved the market for quite some time. While these sanctions will not have a direct impact on day-to-day business life, they show that both U.S. and China are ready to take new steps in their battle against each other, which is a major risk factor as the world economy tries to recover from the hit dealt by the coronavirus pandemic.

Inflation Is Expected To Return Back Into The Positive Territory

Tomorrow, the U.S. will provide Inflation Rate and Core Inflation Rate reports for June.

Inflation Rate is expected to grow from -0.1% to 0.5% on a month-over-month basis as consumer activity increased.

Any weakness in Inflation Rate will likely be interpreted as a sign that consumers are still anxious about their financial perspectives and that more stimulus is needed to improve the situation.

For a look at all of today’s economic events, check out our economic calendar.