Our Current Thinking On Financials and Industrials

Our updated narrative on two troubled sectors, financials and industrials:

To get the gist of what we were thinking a few weeks ago, here’s the “bottom line” comment at the end of our 2/1 assessment of the financial sector:

overall health of the sector, the still positive economic setup, still low
interest rates (if the economy is indeed okay, rates will continue to inch
higher, benefiting bank margins), efficiencies to be gained (read technology)
going forward, and remarkably cheap valuations has us feeling comfortable with
maintaining a top sector weighting for financials going forward.

Here’s this morning’s update:

3/24/19 Update

Financial stocks essentially matched the
broader market’s performance from last update until last week, when the bottom
literally fell out. The main catalyst being the March Fed meeting where the
committee decided that there’ll be no rate hikes whatsoever this year and that
they’ll stop the balance sheet unwind in September. The focus on net interest
margins, once again, trumps all else going for the banking sector at the

Question, should we drop our target
allocation from the current 15%?

While there’s a clear argument to be made for
such a move, my concern is that if I’m right on the overall macro setup, and
there’s no protracted global trade war, the second half of the year will see
optimism come back and the yield curve steepen (per the no rate hike
commitment, and an exodus at the longer-end of the curve). A scenario
that would have money screaming back into a sector that trades at a huge
discount to the broader market.

We’ll let this play out for a few more weeks,
reassessing along the way. I expect strong rallies on any good macro news in
the meantime.

Here’s the summary from our 2/1 narrative on industrials:

Bottom Line: Given the still
decent economic backdrop, the prospects for a U.S. infrastructure bill, the
likelihood for improved trade sentiment (particularly with China) going
forward, and attractive valuations, we’ll maintain our 15% of equities target
to the industrial sector, for the time being

Here’s this morning’s update:


were this year’s market darling through the end of February. Since then, however,
renewed doubts over the details of a trade resolution with China and Boeing’s
tragic second 737 crash in 6 months has severely dented the sector’s
relative returns, although, at the moment, it’s still ahead of the broader
market on the year.

At 15
times forward earnings we’re looking at a nice discount relative to the
S&P. And, despite (or perhaps “because” of) the recent global slowdown, the
prospects for global infrastructure spending remain very high, and the
political risk of a protracted trade war (anywhere) makes it still an unlikely scenario.

maintain our 15% target for the time being. If I were reducing financials today,
I’d bump up industrials with some of the proceeds…


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