“To get the Financials right, I think you need to get the rates of change in both growth and inflation right.”
–Hedgeye CEO Keith McCullough
It was a decidedly dismal day for the Financials sector (XLF) yesterday. The ETF got slammed, down -2.4% versus -0.3% for the broader market.
As the quote above indicates, whether to buy the Financials on this pullback has everything to do with your outlook for U.S. growth and inflation. On that score, the signal is crystal clear:
- U.S. Growth: In the third quarter, GDP was up +1.7% year-over-year growth (+40 basis points versus the prior quarter). Prior to that, U.S. growth slowed for five consecutive quarters (from the peak of 3.3% in March 2015 to 1.3% in June 2016) before the trend finally flipped. We think growth accelerates heading into the fourth quarter.
- Inflation: Today, the Consumer Price Index (CPI) hit a year-over-year headline rate of 2.1% for the month of December from 1.7% in the prior month. This effectively ended 30 straight months of inflation readings that were stubbornly below the Fed’s 2% target. We think inflation accelerates heading into the first quarter of 2017.
WHAT TO BUY
In Real-Time Alerts yesterday, Hedgeye CEO Keith McCullough signaled buy Bank of America (BAC). “If US economic data continues to accelerate, I think the Financials make another higher-low within their bullish intermediate-term TREND,” McCullough wrote.