Protect YOUR $$$$ — Watch For These These Red Flags
Trade war troubles continue to infect the stock market as the Dow Jones Industrial Average lost nearly 2% last week, and fell out of bed again Monday morning.
Of course this stock index is chock full of large-cap multinational companies doing big business in China, Europe and the rest of the world. Stocks that are prime targets for sellers due to the collateral damage a full-blown trade war would inflict on sales and profits.
Another sector fading fast and underperforming the overall market are financial stocks.
This however, is not due to trade war tensions. Instead, the reason why banks and other financial firms are falling behind is more fundamental.
And it could spell trouble for the entire stock market.
Right now investors are fleeing financial stocks at the fastest pace in three years, CNBC reports. Over the past month alone, the SPDR Financial Sector ETF (XLF) has suffered the biggest cash outflows since 2015, with $2.5 billion getting sucked out of financial ETFs.
The S&P 500 Index is a bit under 5% from its January high. XLF meanwhile has plunged more than twice that, down 11.5%.
The question is why are banks and other financial stocks lagging so badly?
After all, the Fed is raising interest rates, which should be a plus for banks who can charge higher interest rates on everything from home mortgages to business loans.
Source: Federal Reserve Bank of St. Louis
The crux of the problem, as you can see above, is that the yield spreads are NOT widening, as they normally would in a rising rate environment.
Long-term interest rates aren’t going up as much as short-term rates. In Wall Street lingo, this is called a narrowing yield-curve, and it’s a sign of trouble for the economy.
A flat or inverted yield curve often precedes an economic recession.
But, the economy appears to be very healthy at the moment, so what gives?
In a word, FEAR.
Investors are nervous about escalating trade tensions with China, the European Union, Canada and Mexico. Basically ALL of our major trading partners.
Big-cap stocks in the Dow and S&P, with large amounts of revenue tied to overseas sales like technology and industrials, are getting crushed. And it’s a sure sign that belief in corporate profits, and the economy itself could be peaking.
A full-blown trade war could tip us over the proverbial edge.
Some still believe calmer heads will ultimately prevail, keeping the U.S. out of an all-out trade war with the rest of the world.
But we can’t say for sure. And one way you can gauge the risk for yourself is by watching the price action of the market’s most vulnerable sectors: Industrials, technology and especially financial stocks.
A red flag in these sectors is a red flag for the whole market.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch