Financial Stocks Can Only Lead For So Long
Since late November 2010, it has been the large major bank stocks that have taken over as the leading sector. Stocks such as J.P. Morgan Chase & Co.(NYSE:JPM), Wells Fargo & Co.(NYSE:WFC), Bank of America Corp.(NYSE:BAC), and Citigroup Inc.(NYSE:C) have soared higher by more than 20 percent in less than three months. The steeper yield curve has certainly been one of the key catalysts for these giant financial institutions.
It is important for investors to remember that these banks can borrow money from the Federal Reserve Bank at zero percent. It has been this way since December 2008 when the Federal Reserve Bank lowered the key Fed funds rate to zero to a quarter percent. The large major banks can buy stocks, bonds, and operate their credit card business with this free money from the Fed . Did you know that they charge their customers an average of 16.75 percent on a credit card. It must be nice to be a banker these days.
Here is the problem and the reason why the banks free money program could be coming to an end soon. Since the Federal Reserve began its $600 billion quantitative easing U.S. Treasury purchasing program the interest rates or yields on the 10 year Treasury Note have surged higher. This is telling the world two things. First it is telling everyone that there is inflation being created everywhere. That is obvious as the emerging market countries rush to increase interest rates in order to fight high inflation. The food riots that are breaking out in the poorer nations around the world also tell us that inflation is here. The second reason that the banker's free money party could end soon because yields are surging despite the Federal Reserve Bank's effort to keep them artificially low. Rising yields tell us that the Federal Reserve bank is once again behind the curve and inflation is here in the U.S. despite it not showing up on the data that they use. How could inflation show up with 9.0 percent unemployment? However, every U.S. consumer can see it at the gasoline pump or at the grocery store. Therefore, the Federal Reserve bank will eventually be forced to end its quantitative easing program and even might have to raise rates later this year.
If the Federal Reserve Bank indicates a move toward tightening the free money bankers party is over. This will end the current bank rally in dead in its tracks. Remember the stock market usually leads the economy by three to six months. Traders and investors should be aware that the increase in bank stocks could last a bit longer, however, it won't last forever.