The financial sector tends to benefit from economic improvements, potential rate increases, and rotational inflows from rate sensitive growth stocks.
The US 10-year is hovering near 1.70%, down from 1.81% – a level not seen since 2020, pre-COVID-19. The sell-off in the credit market spilled over to the equity market trickling to rate sensitive sectors. Increasing interest rates dampen future profits, increase borrowing costs, and bring about uncertainties. And, upward revisions tend to be less friendly towards growth stocks, like technology companies. 2020 was a stellar year for the S&P/TSX Capped Information Technology Index returning 54.6%, and 16.3% in 2020. 2022 so far is a different story. Year to date, sector giant Shopify Inc. is down 23.8% and the group is down 10.8%.
Now, a sector with a reputation to dress up to look its best when rising rates dominate party chatter, is financials – banks, insurance companies, investment banks, brokerages, etc. They tend to be the cool kids at these parties, and particularly the big five.
ZEB is an exchange traded fund managed by BMO Global Asset Management. The ETF is designed to replicate the performance of the Solactive Equal Weight Canada Banks Index. ZEB is used as a proxy, for illustration purposes.
In review of PetroChina (a stake he purchased for $480 million and sold for more than $1 billion), Mr. Warren Buffet noted “one doesn’t need to know a man’s weight to know he’s fat”, referring to the unnecessary need for precise assessment when it’s not required. In similar fashion, to a Technical Analyst, the S&P/TSX Capped Financials Index’s current market structure doesn’t require rigorous assessment to determine its attractiveness.
The S&P/TSX Capped Financials Index is in a strong trend – ascending peaks and posting new highs each leg up. Adding wind to the sails is the exchange traded fund inflow of $2,735 million to Canada’s financial sector in 2021, piling new money and momentum to the space. Relative strength to the S&P/TSX Composite Index is expansive, confirming a bullish sector. From March 2021 to November 2021, relative strength was rangebound, highlighting a period of price consolidation; performance was in line with the S&P/TSX Composite Index. Upward resolution in relative strength near year-end added confidence to the sectors bullish trajectory, and here we are.
ZEB is a near equal weight bank index ETF consisting of six companies – BMO Bank of Montreal, Toronto Dominion Bank, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, and National Bank of Canada. On a broader level, the sector industries include major banks, regional banks, insurance companies, investment managers, investment banks, leasing companies, etc. ZEB, without surprise is highly correlated with the sector and with expanding relative strength clearly on display. In short, big banks are leading the charge within a charging group.
BMO, TD, RBC, CIBC, and Scotia Bank are heading in the same direction while carving out new highs on their way up.
“But, what I really what to know is, are you going to go my way? And I got to, got to know…” sings Mr. Lenny Kravitz on the hook of his 1993 Grammy Award Nominated single. Are You Gonna Go My Way seems like a fitting backdrop for the big banks as they gracefully take center stage on rate hike expectations.
The individual constituents of ZEB, below, share a visible commonality difficult to ignore or misinterpret – big banks share a similar heading while recording new highs, with National Bank being the exception. Nonetheless, the group displays biased direction in price action, relative strength to sector and the broader equity market, and momentum while benefiting from expanding profit margins in potential rising rate environments. Should current trends persist in this group, then yes, yes Mr. Kravitz, we’re gonna go your way – your way seems to be the path of least resistance.
