You have probably heard me talk about the Three B’s before.
It stands for banks, biotechs, and builders, and is a fun and convenient acronym I use when discussing the most interest rate-sensitive stocks.
These groups could not be more different, but they share a key similarity in the sense that they all move in synchrony with the bond market.
Biotechs are some of the longest-duration equities, so lower rates boost their valuations. It also allows these chronic cash-burners to access capital cheaply.
Builders sell houses, and lower rates are the key demand driver, so that one is obvious.
And banks are new to the lower rates list.
We used to say banks want higher rates, or a higher spread—it’s how they make money. However, that changed recently as asset-liability matching issues arose from lending operations during the last rate-hiking cycle. Lower rates would relieve a lot of stress on the fixed-rate assets they hold and shore up balance sheets.
The bottom line is that all these groups stand to benefit—and even take on renewed leadership roles— if rates were to come down. We’ve seen them outperform in the past when this was the case.
And we’ve also seen it in the opposite direction… which has been the case since last year’s highs.
Here is a chart showing an equal-weight index of the ThreeB’s compared with treasury bonds:
It’s not perfect, but all three of these industry groups tend to ride the waves with the bond market.
Notice how the bull market for these interest rate-sensitive stocks ended abruptly last year right around the same time bonds began collapsing.
Bonds peaked in September and promptly rolled over. The 10-year yield ripped from 3.60% to 4.80% over the course of the next 4 months.
During this period, homebuilders, banks, and biotechs each experienced drawdowns of more than 30%.
But I think that’s over now, and I think it has everything to do with the idea that rates have peaked for this cycle.
And don’t shoot the messenger, because I’m not the one saying it—the market is. All these interest rate-sensitive areas are heating up.
Builders had one of their best sessions of the past few years today.
Biotechs are the only thing working in health care.
And I think you throw the impressive performance from speculative growth into this conversation. That price action is the kind of thing you see when liquidity is improving and rates are coming down.
And lastly, the banks put up a major move today, confirming this theme as well.
Here’s the Regional Bank Index $KRE reclaiming its VWAP from the post-election breakaway gap on November 6th.
It’s ironic because that’s around the last time I felt this good about the banks.
I think they and the other B’s are poised for new leadership into the back half of the year. I think these are the groups you want to overweight if you believe rates are headed lower.
And we’ve already been doing it via Breakout Multiplier. Last week, we put new trades on banks and builders, and today we sold the double in both of them.
For those looking to play this trend through common stock, the team and I will publish notes on each of these three subsectors, along with our favorite current trade ideas for members, over the course of the coming week. Sign up for ASC Premium and get those trades as soon as they trigger.
