Consumer Finance

Consumer finance stocks have been among the worst financial sector performers in the last six months creating a negative divergence with bullish macro drivers. For instance, relative performance has far undershot the level implied by the decline in unemployment claims and the housing market (top panel). Household net worth has spiked back toward all-time highs as a share of disposable income courtesy of the recovery in financial markets and residential real estate value. Importantly, wages & salaries growth is robust, courtesy of U.S. dollar strength and the collapse in fuel prices, which should underpin consumer appetite for debt. Revolving consumer credit, a good proxy for credit card debt, has been growing at a pre-financial crisis clip since last autumn. That is a major change from the first few years after the crisis, when debt growth was extremely volatile, which created uncertainty about the sustainability of credit card company receivables growth, and capped valuations. A more stable outlook should translate into a higher multiple, all else equal. We recommend an overweight position, and a new long/short trade vs. banks, please see the next Insight. The ticker symbols for the stocks in this index are: AXP, COF, SYF, DFS, NAVI. bca.uses_in_2016_03_22_001_c1 bca.uses_in_2016_03_22_001_c1

A dovish Fed bought the bounce a bit more time, but there is little incentive to add portfolio risk. Buy consumer finance, especially vs. banks, and expect communications equipment outperformance.

Greater safety for European taxpayers and bank depositors necessarily means more risk for bank equity and bond investors. We provide some detail, and also initiate two new short-term positions.