The financial services sector is in the midst of a digital transformation.
With 20,000 clients worldwide and 27 billion transactions processed, Fidelity National Information Services (FIS) is in a unique position to capitalize. Its business and share price have reached a pivotal point of inflection, which is why we put them in our Pivotal Point Trader portfolio last week.
It is time to take on new positions ahead of the important next phase.
It’s easy to become jaded. We take for granted the services Fidelity pioneered. Today it’s possible to deposit checks by snapping pictures, and send money to the kids at college with a few smart phone taps and swipes. Tomorrow, we will access ATMs with our smart devices and pay bills by talking to internet appliances.
All of these innovations stem from the growth of digital, and the slow demise of cash.
Fidelity is the world’s leading provider of financial technology solutions. It offers an industry-leading software platform, and consulting services to make sure everything runs smoothly. And with major divisions in banking, payments, brokerage, and corporate services, its reach is deep. Clients merely add on the bits and pieces they want to service their customers.
Increasingly, they want many of those bits and pieces.
In 2016, sales grew 40.1% to $9.24 billion as banks, brokers, insurers and enterprises embraced digital. There is good reason. It improves operational efficiencies. Customers have come to expect the convenience of doing most transactions on their smart phones, tablets and computers.
For the industry, it’s a huge win. Replacing customer service agents with computer software is an enormous cost savings. According to a Reuters report, European Union banks closed 9,100 branches in 2016, and gave 50,000 workers pink slips. Although the industry still employs 2.8 million people, that figure is the lowest since 1997.
This trend is moving to the United States. Wells Fargo (WFC), an enthusiastic early adopter of financial tech, plans to shutter 450 branches. Widespread closures are plannedat Bank of America (BAC) and JPMorgan Chase (JPM), too. The goal is to move a large part of the front end of the operation online.
It helps that banks are now courting a generation who grew up online. Eighty-five million millennials are coming of age right now. McKinsey & Co., a global consultancy, finds they are considerably more open to online banking than the preceding generations.
All of this dovetails with the services Fidelity provides.
After reaching a high at $96.67 recently, Fidelity shares have pulled back to $93. The consolidation is almost complete. The stock is now near-term oversold. A rally beyond $96.67 would be a major upside breakout and will set up the next big leg higher. Keep holding.
VALUE TRAP
What’s weird about this stretch of the market cycle is that there is a small group of stocks that are doing really well and a small group of major stocks that are doing really bad. And then there’s this big swath of stocks in the middle that are doing nothing – just wandering around like dazed bus passengers who aren’t allowed off at any stop.
Jason Goepfert at SentimentTrader.com says that there have never been so many winning and losing stocks at the same time. The only time that came close, he reports, was Aug. 5, 2015, right before a sizeable correction. “This is neither normal nor healthy,” he adds. And I would have to agree.
Most of the stocks in the uncomfortable middle and lower strata are value stocks. So if you have value-oriented mutual funds, you probably know that they have just not kept up with the indexes. And you’re probably wondering why everyone is making a fuss about the 2017 market.
The chart above illustrates this perfectly: The growth stocks in the S&P 500 (SPYG) are up 24% so far this year, while the value stocks (SPYV) are up just 9.3%. The biggest stocks in SPYG are Apple, Microsoft, Amazon.com, Facebook, Alphabet, Johnson & Johnson, Visa and UnitedHealth. The biggest stocks in the SPYV are ExxonMobil, JPMorgan Chase, Wells Fargo, Chevron, AT&T and General Electric.
Trends like this typically are reinforced in the final month and a half of a year. You normally have to wait until the new year begins to see a reversal of fortune. So it’s usually smart to hold off on any contrarian urges you have to buy value stocks like these while they are under attack. Advanced investors making choices on their own can nibble, to be sure. Just don’t expect much reward until at least the calendar page flips to January.
NEW FED HEAD COULD FLIP THE SCRIPT
Mario Draghi, the dapper and clever president of the European Central Bank, rescued the eurozone from disaster in 2012 by telling markets he would do “whatever it takes” to save credit on the continent. There were a lot of skeptics at the time, but he has showed that he meant it.
He bought all the government debt he could put into a vault. Then he bought corporate debt. Even today, the ECB is reported to be the buyer of 20% of new corporate issuance. Companies that used to have to issue junk-rated debt now can issue bonds at incredibly low rates.
So what happens now that the economy appears to have stabilized? TIS Group analysts in a report this week wonder out loud whether the ECB will follow the Fed and begin to sell off their historic portfolio. It now owns around 12% of all eurozone corporate bonds, so a selloff could be very painful.
The analysts’ answer: “We think the answer is very likely no, for one reason. The Fed, itself, will likely end its portfolio selloff and interest rate normalization programs.”
Now that is a provocative observation. Here’s their out of consensus view:
“The Fed’s new chairman, Jerome Powell, will not likely continue to push the same policies of Janet Yellen when he takes over in February. Ms. Yellen was concerned with restoring the integrity of the Fed, and getting interest rates back to an historic norm. President Trump chose Powell, and we think he is only interested in one thing; trade. He ran on the platform of renegotiating America’s trade deals. What a better way to get a good deal than to have a weak currency?”
Good point. TIS analysts believe that weakening the dollar further will be the main goal going forward. “Both the U.S. and the EU debt levels are well beyond any reasonable level of fair repayment. Inflating away the debt is really the only path from here. We should expect it and prepare for it.”
I must say, it’s not a far-fetched idea at all. No one is thinking this way, so it’s a distinct possibility. This would be a good environment for commodities and multinational companies. Stay tuned.
NOTES ON MY SCORECARD
– Since 1900, U.S. stocks have suffered declines of 2%+ on about 2% of all trading days, which averages to five per year. A 2% decline for the Dow Jones Industrials at current levels amounts to 500 points. We are well below average in 2% one-day declines this year. Be prepared to see one in the next month and a half. It will most likely be a buying opportunity.
– Stocks in the United States and overseas are currently the most overbought they have been since mid-November last year in the first week after the election. Even in this extraordinary year, there should be a consolidation. A sideways crawl for a few weeks at least. Since this is seasonally among the best stretches of the year, any serious pullback days are likely to be met by buying.
– Small-caps and bonds have already begun to pullback. This is probably a reflection of the market’s view that final legislation for tax reform or cuts are not likely to materialize this quarter, as small companies pay more in taxes, proportionally, than large companies.
– The Dow Jones Industrial Average is up 28.5% since the GOP presidential victory on Nov. 8 last year. This is great, but not historic. Seven other presidents have seen the Dow rise 20% or more in the year after their election date or the day they took office if taking over after a death. Other notable gainers were FDR, +47.9% in the year after Nov. 8, 1932; Truman, +30.6%; LBJ, +25.2%; George HW Bush, +23.3%.
– The second year after a presidential election has been much weaker than the first year, according to Bespoke Investment Group data: First year, the average is 8.14%; second year is +0.62%. In the cases of the strong ones above, here are the second-year results: FDR, +1.8%; Truman, -17%; LBJ, +6.2%; GHW Bush, -6.84%.
– Another take on the same data from Bespoke: After years where the DJIA rallied more than 20%, performance was negative in the second year two-thirds of the time. As I have said many times, history is not destiny. But at the very least there is a clear tendency for a chilling of emotion in the second year of a president’s term when the first year has amounted to a happy honeymoon.
– Since the election, the best major U.S. index/ETF has been Nasdaq 100 (QQQ), +32.5%, followed by Dow Jones Industrials (DIA), +30.7%; and Russell 2000 (IWM), +23%. The best sector has been technology (XLK), +36.1%; and financials (XLF), +32.6%. Worst has been telecom (IYZ), -5.1% and energy (XLE), +5.7%.
– Best overseas index/ETF has been Italy (EWI), +41.7%; Germany (EWG), +30.2%; France (EWQ), +30.8%; China (ASHR), +26.6%.
– Best commodity since the election: Crude oil (USO), +13.1%; gold (GLD) is -0.4%; silver (SLV) is down 8.3%.
– Microsoft, Alphabet, Amazon.com and Facebook have seen their market cap collectively increase by $1 trillion since Election Day last year. Wow.
– The most unusual and historic development this year has not been the stock market gains so far, but the lack of volatility. The S&P 500’s average absolute daily change over the past year has been just +/- 0.3%. That’s lower than any other year in the past century except for the first half of 1965, according to Bespoke data. Since markets are mean-regressing machines, you just have to guess that volatility will pick up dramatically next year, though I’m not making any early bets on it.
– Valuation wise, rising earnings have kept the S&P 500 from becoming too expensive while prices have risen. The index’s components’ 12-month trailing P/E ratio has only risen to 21.8 from 20.1.
– Consumer staples and telecom have actually seen their multiples contract. Sectors with expanding multiples: real estate, tech, consumer discretionary, financials, industrials and utilities.
– Bespoke ran their famous decile analysis on the S&P 500 returns since Election Day last year to determine which factors have been most responsible for gains. Here are their findings:
– The average stock that was in the S&P 500 on 11/8/16 is up 17% since then.
– The stocks that have done the very best since Trump’s victory have been the ones that generate the highest percentage of their revenues outside of the U.S. This is ironic given that Trump ran on a “Make America Great Again” slogan.
– The stocks that have done the worst since Trump’s victory are the ones that had the highest dividend yields at the time. This decile of stocks is only up an average of 3.86% since 11/8/16.
– Typically, stocks with the highest short interest outperform during market rallies, but the exact opposite has been the case in the last year.
We’ve been on the right side of the market so far with our tenacious, research-driven, unsentimental approach. The markets fortunately tend to reward a spirited mix of patience and opportunism.
Thanks for reading, and see you again soon.
Jon