This Correlation Just Hit A Record High, But Goldman Says Don’t Worry About Financials

To be sure, one could argue that the financials are actually holding up quite a bit better than they should be holding up given the flattening in the curve we’ve seen since the post-election reflationary euphoria.

 

The CCAR results helped, earnings (by and large), didn’t.

But another thing that’s not helping is the macro backdrop – specifically, the extent to which turmoil in Washington (i.e. the policy agenda getting continually delayed) and lackluster incoming data has weighed on 10Y yields.

On the econ side, this has become the labor market and sentiment against the world. That is, it’s not just the inflation prints that are coming in cold. Have a look:

 

 

(BofAML)

Now have a look at the relative performance of the financials versus the S&P plotted with 10Y yields:

 

Underscoring a similar dynamic, Goldman notes that “the correlation between Financials’ excess returns and 10-year US Treasury yields stands at nearly the highest level on record(Exhibit 1) as fundamentally, Financials and interest rates have sensitivity to economic growth and the sector’s profits are strongly related to interest rates”:

So why be bullish the financials given the likelihood that the situation in Washington is only going to get worse and given the fact that we’ve yet to see any convincing signs of a sustained upturn in realized inflation?

Well for Goldman, the answer is simple: capital returns.

More below…

Via Goldman