Zacks Investment Management

From rising rates and their effect on the markets to the Brexit’s failed plan attempts and PG&E filing for bankruptcy, this week was filled with ups and downs. Through it all, one factor seems to remain consistent – volatility. Read on to get the Zacks view.

The Financials Sector Benefiting from Rising Interest Rates – While the broad equity markets may be throwing a tantrum over rising interest rates, the banking sector is not. Higher rates for banks means being able to charge higher rates for loans and credit cards, an obvious plus for bank revenues. In theory, banks should also be responding by raising the yields on savings accounts (deposits), which would mean keeping net interest income (which is the difference between what a bank earns on loans and what it pays on deposits) consistent even in a rising rate environment. In practice, banks are lifting loan rates more and faster than they’re lifting deposit rates, meaning that net interest income is rising. According to Bankrate.com, the average yield on savings accounts has held steady at 0.09% since January 2018 while average credit-card rates have gone up 1.09% to 17.41%. The results are evident as big banks start to report earnings: JPMorgan’s net interest income rose 10% in the fourth quarter to $14.4 billion, Wells Fargo enjoyed a 3% jump, and Bank of America reported a fourth quarter profit of $7.3 billion. According to The Wall Street Journal, bank executives remarked last week “that despite the market turbulence, underlying business performance and economic trends remain favorable.”¹

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You Can’t Eliminate Volatility, But Here’s How You Can Deal with It!

The challenge that equity investors face is not in finding a way to eliminate volatility—it is in developing a mental approach to dealing with it. This guide will provide you with insights and tips to do just that. Get answers to questions like:

1. Market downturns can and will occur, but what should you do?
2. How can diversification help you manage volatility without compromising your returns?
3. When volatility is too much for you to handle, how can a money manager help?
4. Can volatility actually be an opportunity?

If you and $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!

Download Zacks Volatility Guide, “Helping You Manage Market Volatility.”²

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Brexit Failures Pile On – last week Brexit suffered yet another monumental defeat, with British Parliament voting soundly against Prime Minister May’s latest plan to leave the EU. The Prime Minister may have survived another ‘no confidence’ vote following the Brexit failure and remains in power, but she has until Monday to bring forward an alternate plan. May remains caught in a quagmire of needing to prove to European officials that she has support for a deal at home while also needing to prove to Parliament that she can gain additional concessions from the bloc. The possibility of Britain crashing out of the EU without a deal or holding a second referendum on whether to leave went from remote possibilities just months ago to real possibilities today. With the deadline about 10 weeks away, corporations on both sides are busily making contingency plans for a hard exit. A no-deal Brexit could mean time-consuming customs checks, potentially expensive tariffs on goods that currently trade seamlessly and tax-free, and dented sales.³

Moderating Earnings Expectations – the sugar high of fiscal stimulus (corporate tax cut) and easy monetary policy appear to be wearing off, as S&P 500 companies are backing away from stout corporate earnings estimates for Q4 2018. In September, fourth quarter earnings growth estimates averaged about 17% year-over-year, but many companies are revising downward – a generally negative sign for those companies’ stock performance. Apple made headlines in late December for their rare downward revenue revision, and other big names like Macy’s and Delta Airlines have recently joined in the chorus of lower earnings estimates, with average year-over-year growth falling to an average of 11%.⁴ 

PG&E Files for Bankruptcy – one of the U.S.’s major utility companies, PG&E, filed for bankruptcy protection last week as it faces the potential for $30 billion in liability costs for its role in California wildfires. Shares of PG&E have fallen some 80% since the major Camp Fire took hold in early November, which also marks a time when the stock market was in the throes of a downward correction. For many investors who generally seek out Utilities as a hedge against downside volatility, PG&E’s experience is a reminder that bottom-up analysis is critical to any investment strategy.⁵

This week continues to shine a light on the challenge most equity investors are facing and will most likely continue to face throughout the year – how to react to volatility. In our view, it is important to remember that volatility is a normal part of the ebb and flow of the markets. We believe the key is not to look for ways to eliminate it, but developing a mental approach to dealing with it.

Our Volatility guide, “Helping You Manage Market Volatility,”⁶ will provide you with insights and tips to do just that. Get answers to questions like:

1. Market downturns can and will occur, but what should you do?
2. How can diversification help you manage volatility without compromising your returns?
3. When volatility is too much for you to handle, how can a money manager help?
4. Can volatility actually be an opportunity?

If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!

Disclosure