The Banks Have Had A Great Run Globally

The chart below shows an interesting global trend which has been occurring in the past few quarters. As you can see, bank stocks’ 12 month forward multiples are rising in Japan, America, the U.K., and Europe. American net interest margins are improving as the Fed is raising rates unlike the central banks from the countries below. This gives the American banks some momentum. That might be why American banks are outperforming. It’s true that the earnings estimates should cover this improvement, but trends are often underestimated by analysts in both directions. It’s why you saw companies in the energy market missing expectations in 2016 even as analysts lowered their projections to account for lower oil prices. Global growth has been accelerating which helps loan demand for banks in all these regions.

The banks in America also might be outperforming because of the possibility of tax reform and regulatory reform. The odds are diminished for tax reform, but both combined probably come close to 50% odds. One notable factor which isn’t included in these forward estimates is the decline in insurers’ earnings. That’s because there was never a point where the hurricanes hurt 12-month earnings expectations. No one knew there would be 2 major hurricanes hitting the U.S. 10 months ago when they were making full year forecasts. The financials are heavily represented in the small cap indexes, so these loses make their current multiples look artificially high. Keep that in mind when bears show the Russell 2000 current PE being inextricably high.

Blowout Chicago PMI Report

The Chicago PMI was released on Tuesday. As you can see, the index hit a 6.5 year high. It was up from last month’s report of 65.2. Backlogs were the highest in 43 years. This is a result of the carryover effect from last month which had the highest backlogs in 29 years because of the hurricanes. This shows that even some of the October numbers were affected by the hurricanes. New orders hit the second highest level since May 2014. Production growth was the highest since August 2014. The employment index fell below 50 because of the shortage of skilled workers. Firms have started to lose workers to other firms which offer higher wages. This a great indicator for wage growth. On the other hand, even with this increase in wages, the inflation pressures fell. This was catalyzed by the ending of some of the shortages which were caused by the hurricanes. The decline in inflation after the hurricanes, which I have discussed previously, could rear its ugly head in October’s CPI report. Other factors make me more optimistic on inflation in the medium term such as the M2 velocity of money.

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