We had a spectacular divergence in the financials yesterday that no one seemed to notice: Out of the regionals and into the nationals and internationals. This is a shift that hasn't gone on for ages.
If you recall, last week JP Morgan (JPM) , Citigroup (C) and Wells Fargo (WFC) reported to decidedly mixed views. JP Morgan's stock was the most upsetting. Why? Because the quarter was incredibly good, but the commentary about international turmoil kyboshed an otherwise pretty perfect story.
Wells is in recovery mode; something that has since been the key to the stock's bounced. Citigroup's stock hung in and then rallied, but it had been the most abused coming into the quarter -- which is always helpful, especially when the company is the biggest buyer of its own stock of the group, something it can do because it has gone from worst to first in the eyes of the regulators.
On top of that, when Morgan Stanley (MS) and Goldman Sachs (GS) reported, investors actually ran toward the stocks not away from them. It's worth noting that the stock of Goldman Sachs has had two strong days after the quarter, an aberration from the usual, negative pattern -- particularly on the second day, when the window opens for insider selling.
Again, these two have been among the most subpar in the group. I especially want to call out the change in style from Goldman -- where there will be a de-emphasis on distractions like the Marcus unit and a much more vigilant sales and trading division, my old bailiwick. Now here's what's especially shocking: the noted outsized performance post-reporting of the behemoths versus the once loved regionals.
I can't believe how stark the move is. Beginning with PNC Financial (PNC) and extending to First Horizon National (FHN) , two high-quality regionals, there has been a shocking exodus of buyers as loan growth, market share and profits have all been under pressure, chiefly from non-banks that have cut margins to shreds in many loan categories.
At the same time, they have not been able to benefit from the Fed's at-this-point needless vigilance against inflation, because the longer rates have not allowed for much of a profit on loans. In fact, First Horizon has scaled back on loans in many categories, even as its area, aided by low taxes, has a real boom going for it.
What's astonishing about this move is that these regional banks had been perceived as winners under the Fed's tightening regime. Now they are considered losers and the anointed ones are the banks least levered to the funds rate.
JP Morgan, Citigroup and Goldman in particular have diversified streams of income away from the U.S. -- don't forget Citigroup is only about 50% domestic. I still like banks with big deposit bases, like Bank of America (BAC) -- and the special situation of the repairing Wells Fargo, but Goldman Sachs might be the standout, given how far its stock has fallen. New leadership allows a house-cleaning and a change of direction that could make the bank far more lucrative -- and it is historically the best performing bank since the Fed's CCAR review.
I don't mean to bury the lead, but you know what this divergence is saying? Simple, Fed Chairman Jay Powell is willing to burn down the regional bank engine in order to save it. The wrong-headed, non-data dependent analysis is showing up right here, right now, in the schism between the larger banks less pinned to the cycle versus the regionals, with declining fortunes and profit margins that are influenced by the Fed's tightening.
Already -- beginning with mortgages, but now extending to construction loans -- the Fed's hikes are working to slow down the economy. With data dependence, this would be obvious. But that's not the new world we are in.
We have stumbled into the typical, blind, hard-moneyed Republican tradition of lockstep steps and a pathological fear of inflation -- and it is showing up in just the part of the economy that can choke off the principal creator of jobs, small and medium-sized businesses.
That's what's driving money toward the big guns not tied directly to the Fed. It's what's making the Fed the principal cause of the slowdown, a role that seems uniquely suited to the wrong-headed Jay Powell Fed.