Investors who think the US economy could head south may be worried about holding financial stocks. They may want to think again.
Savita Subramanian, the head of US equity and quantitative strategy at Bank of America Merrill Lynch, says the sector is worth considering.
“It’s not the 2007 toxic sector that derailed the market,” she told Zain Asher on CNN Business’ “Markets Now” live show Wednesday. “It’s really cleaned up its act.”
Subramanian acknowledged that some investors have been concerned about the partial inversion of the yield curve, which is a reliable recession indicator.
Last Friday, the yield on 3-month Treasuries rose above the rate on 10-year Treasuries for the first time since 2007. Such a flip, in which short-term rates jump above long-term rates, has preceded each of the last seven recessions, according to the Federal Reserve Bank of Cleveland.
“Volatility is definitely in the cards for the foreseeable future,” she said.
However, that doesn’t mean that Subramanian believes investors need to run for cover. Right now, it’s better to buy cyclical stocks that grow when the economy grows, rather than defensive stocks that hedge against a shrinking economy, she said.
“You want to look for companies with healthy balance sheets, with predictable and stable earnings growth,” she said. “These are companies that could actually weather a downturn a little bit better than we might have thought, given their more cyclical nature.”
Financial stocks fit that bill, according to Subramanian.
She pointed out that many financial companies offer stable and potentially growing dividends. And counter to popular belief, financial companies can perform well even when short-term interest rates are on hold. The Federal Reserve has signaled that it won’t hike rates in 2019.
That said, it’s hard to read exactly how the inverted yield curve will affect US markets, said Matthew Cheslock, equity trader at Virtu Financial, on “Markets Now.”
“This market really has no historical patterns to it,” he said. “We can’t study this from a textbook.”
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