Interest Rates Up, Banks Down

As of this posting, the real estate and utility sectors are among the worst performing sectors year to date.  On our March 4th posting we highlighted these two sectors.  The S&P 500 is up 2.28%, while real estate is down -3.73% and utilities are down -4.69%.

Interest rates are up since January, which hurts interest rate sensitive sectors.  As interest rates rise, borrowing money becomes more expensive.  This unfavorably affects real estate and utility companies, which are typically highly leveraged.  It is our position that these two areas will continue to underperform the broad market for the year.  The general public reacted adversely to the recent changes in real estate tax law.  As perception is often reality, compounded with rising interest rates this will further negatively impact real estate.

According to Reuters, Wells Fargo recently announced it is looking to cut $4 billion in expenses.  We warned subscribers of Wells Fargo before the scandal broke in 2016.  Our press release from 2016 is here.  If interest rates continue to rise and the real estate market slows, Wells Fargo and other banks will underperform.  Deutsche Bank, Germany’s largest bank recently hit a new 52 week low at just over $10 per share.  As released in the Business Insider, Deutsche Bank recently announced it will cut 7,000 jobs.  The financial sector is now in the red -1.54% year to date.  For the numerous reasons discussed, it is our stance that the negative trend of financials is likely to continue and may accelerate if rates continue higher.  Reallocations for portfolios will be emailed to subscribers this week.

Sources: Reuters, Business Insider