My crystal ball doesn’t see much good coming from 2019. The tax cut party of 2017 must be paid for and that’s $1 trillion being added on to the national debt each year. That means interest rates are rising, so people won’t be buying new houses or cars. It means someone is going to have to pay their taxes, maybe pay more than they expect.
Tech needs a new act beyond clouds and devices, but it will take economic pain before business can start killing jobs with companies in the Technology Select Sector SPDR Fund (NYSEARCA:XLK) again. Biotech is going to be great in the 2020s, but it’s too early for things like the iShares Nasdaq Biotechnology ETF (NYSEARCA:IBB) to start popping. That leaves the big banks. You’ll find them in the Financial Select Sector SPDR Fund (NYSEARCA:XLF).
What Does XLF Own?
The best-known Berkshire insurance holding is Geico, which serves consumers, but they’re also heavily involved in business reinsurance, commercial property insurance and worker’s compensation. Insurance is becoming great again because 2017’s huge losses gave insurance companies pricing power. The group made money for Berkshire in the first quarter.
Most of the rest of XLF’s holdings are the “usual suspects” among the biggest banks. JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) are all in there, along with Goldman Sachs (NYSE:GS) and American Express (NYSE:AXP). Some, most notably, American Express, did quite well in 2018, while others, like Wells Fargo, had a terrible time of it.
Why Buy XLF?
Why buy the big banks going into this recession?
It’s because America’s biggest banks are the strongest banks in the world. It’s because they were the center of the last crisis and were then forced to pass “stress tests” against potential losses through the Federal Reserve. It’s because America’s biggest banks can weather big storms.
Big storms are coming.
Private equity groups that borrowed with both hands when money was cheap are going to find their loans coming due. There’s a mountain of commercial paper that’s going to go bust. Investors have been buying student loans like they’re gilt-edged, and they’re not.
While banks own a lot of this toilet paper, they have mostly been in the business of selling it and making markets in it. They’re going to be hit, but they’re not going to be wrecked. Borrowers are going to be wrecked.
When markets are volatile, and they’re going to be very volatile next year, traders also do very well. All the big banks now make big money in trading. Investment banks, commercial banks, savings banks, they’re all the same bank.
Then there’s the fact that XLF is already dirt cheap. The bank stocks had a lousy 2018, and since the start of the year they’re down 11%. December has been especially rough, a drop of about 10%. XLF is now about 20% off its high of over $30 achieved in January.
It may be washed out.
The Bottom Line
I don’t expect XLF to make investors a lot of money in 2019, but 2019 isn’t going to be a year for making a lot of money. It will be a year for preserving capital, for battening down the hatches, for taking losses and looking for strength.
The big banks represent strength. They won’t be the heart of the next crisis. They will be the fire brigade.
I want to be with the fire brigade.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
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