Joining us on this episode of FinTech TV, Todd Sohn, Chief ETF Strategist and Managing Director at Strategas Asset Management, breaks down the latest movements in the financial sector. With the S&P 500’s financials pulling back over 11% and economically sensitive areas like banks and the Mega 7 screening as oversold, Todd explains what this could mean for the broader market. He highlights how ETF flows and megacap banks may be masking underlying weaknesses in insurance, regional banks, and private asset managers, signaling potential stress points in the sector. Todd also weighs in on rising financial ETF trading volumes, private credit concerns, and widening corporate spreads, advising investors to stay alert and consider defensive strategies like low-volatility ETFs and managed futures to navigate potential market turbulence.
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Well, joining me to weigh in this morning is Todd Sohn, chief ETF strategist and managing director at Stratigas Asset Management.
Good morning, Todd.
Thank you so much for joining me.
So there are a lot of headlines, a lot of moving parts, but if we look at the financial sector in terms of the S&P 500, it is.
The weekly, the weakest performing sector, and we are looking at a pullback of over 11%.
So I understand that economically sensitive areas like banks and the MG 7 are screening as oversold.
What does this tell you about the broader market's next move?
Yeah, Remy, great to be with you.
I, I, I think investors ought to pay very close attention to how the banks, insurance, private asset managers, and the mag 7 all behave over this next coming week.
They're among the oversold areas in our work, not deep oversold, but enough to catch our interest.
And you know, on a tactical sense, when you have a group so important to the American economy, right?
The the mag 7 companies are a major influence in the indices, the financials of the plumbing of all the indices.
Their inability to show some sort of risk appetite here is gonna suggest that the markets are on weaker footing than we may think, despite only being 3 to 5% off the all-time high.
So, I, I, I think it's really much a fight or flight moment for the financials.
Um, I don't wanna get too negative here, but I, I think we're at a pretty interesting inflection point on the market and, uh, and how they, they reflect these areas.
Yes, and we're keeping a close eye on financial ETFs.
So what are the flows telling you right now and tell us about the large cut banks and why you think they're masking the weakness that is happening below the surface.
Yeah, so we, we look at ETF flows as a temperature barometer, right, on how investors look at certain groups.
On one hand, we've seen a lot of money chase industrials, as they have worked.
And on the other, there's a pretty good move away from financials.
I think there's concern there about uh how this private credit weakness might spread.
Now, um, on the banks, they're the largest group within the financials and industries tend to lie.
They can be uh skewed by megacap names, especially in a trillion-dollar world.
So we've seen that from JPMorgan, Wells Fargo, Bank of America, etc. they have masked a lot of the weakness from those private asset managers, from some of the insurance names, the regional banks and whatnot.
So, I think this is a great time to look under the hood, specifically in the financial space, to understand how widespread some of these issues might actually be.
And you're starting to see it show up in corporate spreads too.
We have high yield and investment grades ever so slightly widening out, and, you know, that's usually how more stressful environments begin when these things you know, they were in their bottom decile, they can't stay there too long.
Uh, I think that what is happening in financials is a reflection of that.
Yeah, and I do want to get your take on what the data is telling you.
So financial ETF trading volume is surging, and I understand that historically this points to a major macro event.
So what stress point is driving the behavior that we're seeing today?
Yeah, it's interesting.
Whenever you see the financials ETF volume start to really accelerate and spike, it's usually because there is some sort of event, as you've mentioned, ongoing.
Whether it's bullish or bearish depends on the context of, of the financial backdrop.
You've seen it in elections, and we saw it during COVID, during the regional bank bailout a few years ago, and now a big acceleration probably because of all the private credit weakness.
And so, I would be on guard.
We're seeing more volatile headlines, right?
We've seen plenty of companies start to gate redemptions on their private credit funds.
I think what you're seeing in the financials is an exhibit of that.
Um, and I would also tell you, I think just be on guard for a little bit more volatility, get more defensive if you can in portfolios.
Take a look at low volatility, take a look at managed futures, which can help cushion the blow if equities continue to falter.
It is a great time to diversify and consider alternatives, especially if the financial landscape, um, continues to deteriorate.
Well, Todd, we will have to leave it there for today, but thank you so much for joining us on this Friday morning.
And as always, thank you so much for sharing all of your insights.
Take care.