A healthy banking sector is a requirement for a healthily functioning economy. We saw back in 2008 what can happen when banks gorge on debt and lend recklessly to highly geared market participants. It never ends well. Banking stocks also have a tendency to lead the broader stock market, both higher and lower. Bank shares tend to discount future economic prospects faster than almost any other sector of the market. So, it is with interest that I note the recent turn lower in the financial sector. The KBW Bank Index of US financial shares started making a series of lower highs earlier this year, while the S&P 500 continued its bull market trend. The bank shares were sensing something not quite right with the prospects for the US economy. This month, the banks broke sharply lower and have now dropped -18% from their January 2018 highs. Their recent performance is disturbingly similar to their performance in late 2007 at the start of the financial crisis. Let’s hope we are not in for a repeat performance. I say it again. CAUTION. WARRANTED.
The Active Asset Allocator is defensively positioned with just 5% invested in equities (GDX) and the balance in cash, bonds and precious metals.
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