Thanks to the Fed and the bipartisan infrastructure bill that has (for now at least) been agreed upon, investors returned to their bullish ways last week. The S&P 500 gained nearly 3%, while small-caps were up 5%. Long-term Treasuries were way down on the week as the 10-year yield moved back above 1.5%.
The shift in Fed policy coming out of its quarterly meeting looked like it has the potential sparking at least a minor pullback, but several Fed governors stepped in to soothe the market's nerves with dovish comments.
Prevailing short-term sentiment suggests that the good times could continue this week, but I'm not sure all of that euphoria is fully warranted. Commodities prices are still tumbling, the housing market looks like it's finally cooling and Treasuries have been remarkably strong over the past couple of months despite stocks hitting record highs.
Here are three ETFs I'm going to be watching this week and the narratives that go along with them.
SPDR S&P Bank ETF (KBE)
It wasn't a surprise that all of the major banks easily passed the latest round of stress tests, but the real positive may have been what else came out of the results.
I'm talking about the fact that the Fed will now lift the COVID-related restrictions on dividend increases and share buybacks. Given that we're heading into the Q2 earnings season shortly and the big banks will be leading the way, I expect to see a lot of dividend hikes and buyback announcements over the next few weeks.
Bank stocks shot higher during the tail end of 2020 as it looked like the post-COVID economic recovery was more firmly taking shape. That momentum has faded over the past few months, but a broader resumption of consumer activity throughout the remainder of 2021 should be good news for lenders.
Bank earnings this quarter should look good. Interest rates have been somewhat higher, which should act as a tailwind. The ongoing recovery should push cyclical and value stocks to outperform and the prospect of higher yields should attract some interest.
I'd be a buyer of bank stocks here.
iShares U.S. Consumer Services ETF (IYC)
Up to this point, the economic recovery has been led by the manufacturing sector, not the services side. Factories are humming again, but many consumer-facing businesses are still operating only at partial capacities. With vaccinations continuing to happen, daily new case counts coming down and restrictions slowly being lifted, it could be time for the services sector to take the next leg in the recovery.
This group outperformed the market coming out of the COVID bear market bottom, but it's been three straight months of underperformance since the middle of March. I expect consumer behavior to get stronger as the year progresses and consumer-facing businesses, as they reopen to full capacity, should be primed to see a revenue and earnings boost.
Now looks like an attractive entry point in terms of both potential and value.
Global X U.S. Infrastructure Development ETF (PAVE)
Infrastructure stocks saw a big boost after it was announced that a bipartisan group of U.S. senators had agreed upon the framework of a $1 trillion spending package. The market approved the news, but I'm much less bullish.
First of all, the market's been pricing in some sort of infrastructure spending package for a while and investors have spent much of the last year betting heavily on this sector. I don't see much value in current share prices. In fact, I think all of the good news has pretty much been priced in.
Plus, let's not forget that this agreement isn't law yet. While a group of senators may have come to an agreement, there's no guarantee that this version will even make it through Congress. The highly partisan nature of the political environment will undoubtedly impact the ability of this bill to achieve passage quickly. In fact, it sounds like it already may be falling apart.
I think there's more downside than upside here in infrastructure stocks. The political risk inherent in this sector is high and I'd probably be taking my chips off the table.