{"id":6964,"date":"2017-05-29T16:44:08","date_gmt":"2017-05-29T16:44:08","guid":{"rendered":"https:\/\/fundamentalis.com\/?p=6964"},"modified":"2017-05-29T16:44:08","modified_gmt":"2017-05-29T16:44:08","slug":"the-financial-sector-part-i-revenue-growth-averaged-just-1-5-from-q1-13-to-q4-16","status":"publish","type":"post","link":"https:\/\/fundamentalis.com\/?p=6964","title":{"rendered":"The Financial Sector (part I): Revenue Growth Averaged just 1.5% from Q1 &#8217;13 to Q4 &#8217;16"},"content":{"rendered":"<p>The Financial sector has traded quite punk since March 1, 2017, the day after President Trump&#8217;s address to the joint session of Congress. Part of this &#8211; no doubt &#8211; is a continued flattening of the yield curve, with the absence of inflation, and the FOMC trying to &#8220;normalize&#8221; short-term interest rates. The odds of a June &#8217;17 rate hike still remain elevated &#8211; last I looked between 70% &#8211; 80% &#8211; but much will depend on this coming week&#8217;s May &#8217;17 employment report.<\/p>\n<p>While the higher short-term interest rates help the Financial system in terms of generating spread income, it seems that the slope of the Treasury yield curve is far more important over time.<\/p>\n<p>The Treasury yield curve has flattened since the 10-year Treasury has rallied from 2.60% to this week&#8217;s 2.25%. (The 10-year Treasury yield is nearing critical support. See chart below.)<\/p>\n<p>The Financial sector is up just 1.24% year-to-date (YTD) according to Bespoke&#8217;s weekend missive, under-performing the SP 500 by 667 basis points. Far better than Energy and Telecom, but still way less than the SP 500&#8217;s 7.91% YTD return:<\/p>\n<ul>\n<li><em><strong>Technology:<\/strong><\/em> +19.59% (largest client overweight. Nasdaq up just 6% &#8211; 7% in 2016, but pulling the performance sled in 2017)<\/li>\n<li><em><strong>Cons Disc:<\/strong><\/em> +11.28% (Amazon is big part of this sector return. Amazon not a tech co w\/in SP 500, but Consumer Discretionary component. Long AMZN)<\/li>\n<li><em><strong>Hlth Care:<\/strong><\/em> +9.98% (under weight for clients but gradually lifting biotech and H\/Care weighting)<\/li>\n<li><em><strong>Ute&#8217;s:<\/strong><\/em> +9.35% (none)<\/li>\n<li><em><strong>Cons Spls:<\/strong><\/em> +8.95% (scattered holdings)<\/li>\n<li>SP 500: +7.91%<\/li>\n<li><em><strong>Industrials:<\/strong><\/em> +6.87% (GE largest Industrial long, dramatically under-performing other industrial stocks. Frustrating beyond belief)<\/li>\n<li><em><strong>Basic Mat:<\/strong><\/em> 6.08% (None. Tough sector to invest, low-return commodity businesses which always seem perpetually cheap on valuation)<\/li>\n<li><em><strong>Real Estate:<\/strong><\/em> +3.98% (none, avoiding due to money that poured in during &#8220;safety \/ dividend trade&#8221; from &#8217;08 to &#8217;16.)<\/li>\n<li><em><strong>Financials:<\/strong> <\/em>+1.24% (overweight)<\/li>\n<li><em><strong>Telco:<\/strong><\/em> -11.64% (none for years, dividend yields are very tempting but be very careful.)<\/li>\n<li><em><strong>Energy:<\/strong><\/em> -12.16% (sold remaining XLE this week. Sector hasn&#8217;t rallied on good fundamental news, better prospects for global growth. Fear of more US supply is keeping lid on crude oil prices.)<\/li>\n<\/ul>\n<p>Source: Bespoke Report dated 5\/26\/17<\/p>\n<p><em><strong>So how does the Financial sector look through early 2018 in terms of expected revenue and earnings growth ?\u00a0<\/strong><\/em><\/p>\n<p>Financial Sector (actual and expected earnings growth)<\/p>\n<ul>\n<li><em><strong>Q1 &#8217;18:<\/strong><\/em> +10.8%<\/li>\n<li><em><strong>Q4 &#8217;17:<\/strong><\/em>+17.2%<\/li>\n<li><em><strong>Q3 &#8217;17:<\/strong><\/em>+7.1%<\/li>\n<li><em><strong>Q2 &#8217;17:<\/strong><\/em>+9.6%<\/li>\n<li><em><strong>Q1 &#8217;17:<\/strong><\/em>+19.9%<\/li>\n<li>Q4 &#8217;16: +11.6%<\/li>\n<li>Q3 &#8217;16:+8.5%<\/li>\n<li>Q2 &#8217;16: -4%<\/li>\n<li>Q1 &#8217;16:-10.4%<\/li>\n<li>Q4 &#8217;15: +2.5%<\/li>\n<\/ul>\n<p>Source: Thomson Reuters I\/B\/E\/S<\/p>\n<p>Readers can see that the &#8220;great&#8221; year-over-year earnings growth for the Financial sector in Q1 &#8217;17, was driven as much by weaker comp&#8217;s from Q1 &#8217;16 than anything else. Q2 &#8217;17 should also see some stronger growth thanks to the weaker Q2 &#8217;16 as well.<\/p>\n<p>Here is what caught my eye though:<em><strong> Historical revenue growth of the Financial sector\u00a0<\/strong><\/em><\/p>\n<ul>\n<li>Q1 &#8217;17: +8.8%<\/li>\n<li>Q4 &#8217;16: +4.0%<\/li>\n<li>Q3 &#8217;16: +6.9%<\/li>\n<li>Q2 &#8217;16: +0.9%<\/li>\n<li>Q1 &#8217;16: -1.2%<\/li>\n<li>Q4 &#8217;15: +2.7%<\/li>\n<li>Q3 &#8217;15: +1.0%<\/li>\n<li>Q2 &#8217;15: +4.6%<\/li>\n<li>Q1 &#8217;15: +4.1%<\/li>\n<li>Q4 &#8217;14: +0.7%<\/li>\n<li>Q3 &#8217;14: +5.0%<\/li>\n<li>Q2 &#8217;14: +0.8%<\/li>\n<li>Q1 &#8217;14: -1.9%<\/li>\n<li>Q4 &#8217;13: -10.9%<\/li>\n<li>Q3 &#8217;13: +0.2%<\/li>\n<li>Q2 &#8217;13: +6.2%<\/li>\n<li>Q1 &#8217;13: +4.1%<\/li>\n<li>Q4 &#8217;12: +20.7%<\/li>\n<\/ul>\n<p>Source: Thomson Reuters I\/B\/E\/S historical data<\/p>\n<p>2011 was a tough year for the SP 500 and the stock market as a whole, so the Q4 &#8217;12 +21% revenue growth may be lapping the tough comp of the 2011 issues. The SP 500 only rose 1% on 2011, and it was down 20% year-to-date as of the start of October, 2011.<\/p>\n<p><em><strong>Conclusion:<\/strong><\/em><\/p>\n<ul>\n<li>If Q4 &#8217;12 revenue growth is excluded from the above data set, Financial sector revenue growth &#8220;averaged&#8221; just 1.5% from 2013 &#8211; through Q4 &#8217;16 2016.<\/li>\n<li>If the period from Q1 &#8217;14 through Q4 &#8217;16 is exclusive, the &#8220;average Financial sector revenue growth rises to 2%<\/li>\n<li>If the period from Q1 &#8217;15 through Q4 &#8217;16 is exclusive, the average Financial sector revenue growth rises to 2.9%<\/li>\n<\/ul>\n<p>And therein lies the problem with the Financial sector.<\/p>\n<p>Here is a &#8220;yield&#8221; chart of the 10-year Treasury<\/p>\n<figure id=\"attachment_6976\" aria-describedby=\"caption-attachment-6976\" style=\"width: 300px\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/fundamentalis.com\/?attachment_id=6976\" rel=\"attachment wp-att-6976\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-6976\" src=\"https:\/\/fundamentalis.com\/wp-content\/uploads\/TNXweekly52617-300x169.png\" alt=\"\" width=\"300\" height=\"169\" srcset=\"https:\/\/fundamentalis.com\/wp-content\/uploads\/TNXweekly52617-300x169.png 300w, https:\/\/fundamentalis.com\/wp-content\/uploads\/TNXweekly52617-768x432.png 768w, https:\/\/fundamentalis.com\/wp-content\/uploads\/TNXweekly52617-1024x576.png 1024w, https:\/\/fundamentalis.com\/wp-content\/uploads\/TNXweekly52617.png 1920w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a><figcaption id=\"caption-attachment-6976\" class=\"wp-caption-text\">Click to enlarge<\/figcaption><\/figure>\n<p>&nbsp;<\/p>\n<p>This is a CBOE (Chicago Board of Options) 10-year Treasury Yield Index. It is a &#8220;weekly&#8221; chart that clearly shows the double-bottom in the 10-year Treasury yield near 1.33% &#8211; 1.39% in both July 2012 and early July, 2016.<\/p>\n<p>The chart also shows a 10-year Treasury yield that trades below 2.10 &#8211; 2.15% (note trendline) will mean the uptrend in Treasury yields that started last July &#8217;16 is now broken.<\/p>\n<p>Part II to follow Tuesday, May 30th.<\/p>\n<p>Thanks for reading.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Financial sector has traded quite punk since March 1, 2017, the day after President Trump&#8217;s address to the joint&hellip;<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[84,53],"tags":[],"class_list":["post-6964","post","type-post","status-publish","format-standard","hentry","category-financial-sector","category-financials"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/6964","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=6964"}],"version-history":[{"count":10,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/6964\/revisions"}],"predecessor-version":[{"id":6978,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/6964\/revisions\/6978"}],"wp:attachment":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=6964"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=6964"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=6964"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}