Don’t Forget About the DOW

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Interestingly, the Dow was a big outperformer on the day (up .76%), and usually when that happens there is one stock that is up several percentage points that skews the average.  Interestingly, that was not the case on Monday, as the strength in the Dow was evenly spread across many of the index components (TRV, The Travelers, was the best performing stock in the index up just 1.79%).

The Dow is now up 5.76% for the year, about half of the S&P 500.  The reason for this underperformance has to do with the sectors that have rallied the most year to date (Tech and Financials) which are more heavily weighted in the S&P than in the Dow (plus the Dow doesn’t have AAPL).

But, the outperformance today should be noted.  If we are heading into a period of concern/weakness in the markets, the sturdy, somewhat stodgy, industrial companies in the Dow, with strong cash flows, good yields, and decidedly less economically sensitive businesses, will outperform.

If investors are concerned about the market trading like it’s 2011, then perhaps it’s helpful to look at what worked in 2011.  Keep in mind, in 2011 the Dow finished up 5.5%, while the S&P was flat, and the NASDAQ fell 1.8%.

 

Steepening Yield Curve a Bullish Sign for Bank Stocks

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As you probably know, the banking sector has been one of the best performing of the year (up 28% year to date). I think it’s safe to say that the banks have probably become a bit overbought here, and that a correction of some sort is due. So, if you’re not already long the banks, it would be foolish to buy them here.

But, that short term overbought situation aside, one of the things that has been happening lately, that is very bullish for banks, is that the yield curve has been steepening for the first time in a while.

The difference in yield between the 10 year government bond and the two year government bond has risen sharply so far this year, and that speaks directly to banks “Net Interest Margin.“

As you probably know, banks make money by borrowing short term at low rates, and lending long term at high rates. That difference is called the Net Interest Margin, and that’s the profit the bank earns.

Well, as the yield curve steepens, the net interest margin of banks increases. So, despite the potential of a decline in the short term, the underlying fundamentals are turning more positive for banks, and a decline in the banks should be viewed as a long term buying opportunity.

Finally, while a steepening yield curve is bullish for bank stocks, there is actually an ETN that you can buy that actually rises as the yield curve itself steepens. The ETN symbol is STPP. Seems like there’s an ETF (or ETN) for everything these days.