Weekly Review 16-20.1.2017

This Week Trump Moves into the Oval Office

And now we wait for “The Donald” to be sworn in as the 45th U.S. president, on a shortened trading week to boot, with markets closed on Monday for Martin Luther King Day, only opening on Tuesday for trading. “Trump trading,” which dominated the stock market over the last few weeks leading up to the president-elect’s inauguration this Friday, January 20th, is likely to be checked to some degree. This past week, moments before the kickoff of the Q4 2016 earnings season, the market took a short breather, closing mixed, the NASDAQ trading up at a new historical high at the 5,574 point level, while the S&P 500 closed the week down by 0.1% at the 2,274 point level, and the Dow also ended slightly off by 0.4% at the 19,885 point level.

The swearing in of Donald J. Trump will be the biggest event of the week, investors eagerly anticipating what the 45th president of the U.S.A. has to say upon addressing the nation as president for the first time. Even before Trump’s inauguration, the market got a dose of drama with the kickoff of the earnings season this past Friday with the release of the results of the first round of large banks. Banking stocks will remain beloved to investors as long as earnings reports this coming week highlight improved earnings forecasts.

Wells Fargo (WFC), J.P. Morgan (JPM) and Bank of America (BAC) opened the earnings season last Friday on a positive note, sending the banking sector (KBE) sharply up by 2.3% to a high not seen since February 2008, some of the gains though dissipating by the time the end of the trading day rolled around. The sector closed up 1.11%, in comparison with the 0.2% gains on the S&P 500.

Large bank managers expressed optimism on Friday in regards to 2017. The banking index soared 24.8% between November 8th and December 9th, and then traded sideways for a month’s time as bond yields continually fell as investors found themselves waiting for both earnings reports and more crystallized plans from the Trump camp about his support for lower corporate tax rates, fiscal stimulus and loosened regulation, all of which aid banks.

Earnings reports and guidance from additional large banks expected for this coming week are likely to continue to prop up the sector. Results are expected to be good and the same goes for forecasts, and so there’s room for additional gains. Until we see the sky clouding over entirely, banking stocks will presumably be a market favorite.

The banking index is now trading at a 12-month forward earnings multiple (PE) of 13.6, in contrast with a mean PE of 11 over the last 5 years, though in keeping with the sector’s average PE of 13.1 over the last 10 years. The PE of banks is still significantly lower than the price premium given the S&P 500, which is trading at a forward PE of 17. In tandem, ever since the U.S. elections, the gap between the pricing of banking stocks and the market as a whole has been shrinking. The valuation of banks over the last few months has made them into the apple of the market’s eye – and even though, as the saying goes, “what goes up most come down,” as long as banks’ earnings forecasts grow, the sector will retain its popularity among investors.

The banking stocks that will be reporting this coming week will include: Morgan Stanley (MS) on Tuesday, Citibank (C) on Wednesday, and then BB&T (BBT), KeyCorp (KEY), and Bank of New York Mellon Corp (BK) on Thursday.

Have a great trading week!