Why You Can't Ignore This Corner of the Market
Editor's note: A massive opportunity is approaching...
The departure of former President Joe Biden sets the stage for President Donald Trump to implement looser regulations in the banking system. And many investors are unsure how these changes will impact the economy...
According to Joel Litman and Rob Spivey of our corporate affiliate Altimetry, this new direction is quietly setting up a huge moneymaking opportunity for investors.
In today's Masters Series, adapted from the January 10 and January 27 issues of the free Altimetry Daily Authority e-letter, Joel and Rob explain why the banking sector is poised for massive growth this year...
Why You Can't Ignore This Corner of the Market
We're already midway through a recession... at least, according to one indicator.
But the reality might not be so clear.
Last month, the 10-year/three-month spread finally normalized for the first time since late 2022.
It's a good sign for many reasons. It's also a surprising sign.
That's because this yield curve "uninversion" looks different from the past three... which took place during the dot-com bubble, the Great Recession, and the pandemic.
And the difference could mean a big boost for the economy in 2025.
If you need a refresher, the yield curve measures interest rates of U.S. Treasury bonds over various time horizons...
Normally, longer-dated bonds have higher rates because there's more uncertainty that far out. A normal yield curve means that investors are optimistic about the immediate future.
An inverted yield curve is when short-term bond interest rates climb above long-term interest rates. It shows the market believes the economy will be worse in the short term than in the long term. That's why it tends to indicate a looming recession.
And when it uninverts, it's usually because the three-month Treasury yield plunges faster than the 10-year yield. Said another way, it's because investors are betting on the economy slowing down.
This time, though, the yield curve uninverted for a unique reason. The 10-year Treasury yield is rising instead of falling.
Take a look...
Investors aren't simply less pessimistic about the economy's long-term prospects than its short-term prospects. They're regaining confidence.
That should translate to economic growth.
As is so often the case in the economy, it all comes down to credit...
You see, banks make money by lending long and borrowing short. When they borrow money – typically in the form of deposits from individuals and businesses – those depositors can take out their money immediately. In exchange, banks only have to pay a tiny amount of interest.
And they lend that money out by issuing loans that typically last multiple years. By taking on the risk of not getting that money for years, they're able to charge higher interest rates.
This works as long as banks can make more money on interest than they have to give out. But when the yield curve is inverted, like it has been for more than two straight years, the story changes. It costs more to borrow short than to lend long.
Put simply, banks can't make money. So they close up shop and wait for better conditions to make loans.
This starves the economy of credit... which slows it down, exactly as the market predicted in the first place.
Now that the 10-year yield is rising, banks can once again borrow short and lend long...
That means a lot more money for banks... which means they can issue a lot more loans... which means companies can once again invest in their operations.
Folks, back in December, we covered how banks are on the cusp of loosening lending standards. With the 10-year yield moving higher, the economy has even more reason to keep growing for the foreseeable future.
Increased bank lending should help support investment in areas like supply chains and AI innovation.
On top of that, more changes are coming to the banking sector that could be a huge boon for investors...
You see, this corner of the market popped after the election results were announced...
And it was one of the best-performing sectors through the rest of November 2024. The SPDR S&P Regional Banking Fund (KRE), which tracks a basket of regional bank stocks, ended the month up 15%.
Part of the reason is due to President Trump's policy approach. He has pushed a deregulation agenda before, and he's already doing so again.
But the market isn't just reacting to a return to Trump's deregulation agenda. It's arguably more excited that the Biden era is over.
Across the George W. Bush, Obama, and first Trump administrations, the U.S. averaged more than 200 bank merger-and-acquisition (M&A) deals per year. Those deals consistently closed within five months.
The Biden administration invested a lot of efforts into more regulation. Bank deals came to a standstill. Just over 500 deals have gone through during his time in office. The number of deals has fallen every year.
Not to mention, those deals are taking longer than ever to close. Take a look...
The Biden administration has seen the slowest M&A era of this millennium. No wonder the industry is celebrating his departure.
We're poised for the biggest bank M&A surge in modern history...
Banks want to combine. This industry is home to hundreds of "zombies" that would like nothing more than to sell... and put their cash to work.
(Like the name suggests, a zombie bank is a bank that isn't dead... but it can't be considered alive and well, either.)
Many industry experts are calling for consolidation to surge under Trump. We agree... All signs point to more bank M&A.
And while that's generally a good thing for the financial sector... it's great for the companies that are trying to scoop up smaller competitors. Investors looking for an extra edge should focus on banks that are talking about consolidating.
Barring a negative catalyst, this is the recipe for a great year in 2025... turbocharged by bank lending and consolidation.
Regards,
Joel Litman and Rob Spivey
Editor's note: We're already seeing the impact of the new presidential administration...
Trump has signed a record number of executive orders since his election victory – making waves across myriad industries amid an ongoing trade war. This approach has left many investors uncertain about what he'll do next.
But Joel and Rob have been waiting for a moment like this for 30 years...
You see, Trump's deregulation agenda is set to change how companies report earnings, potentially sending a handful of little-known stocks soaring. Joel just went on camera to reveal how his system can help you uncover these under-the-radar buying opportunities.