Asset Allocation: Financials Blow Past the Broad Market

June 27, 2025 |  Premium Service | In this issue of The Institutional Risk Analyst, we return to some past themes and ponder asset allocation in 2H 2025. One of they key themes we identified in pass missives is the tendency for both stocks and bonds to climb the proverbial wall of worry.  As of Friday’s opening, equity benchmarks are touching record levels and the 10-year Treasury was back down to 4.25% yield, as we predicted. And yes, despite dire predictions, the dollar remains the default currency for global markets. 

“I think the dollar is still the number one safe haven currency, and I don't think it's -- you know, I would say these narratives of decline are premature and a bit overdone,” Fed Chairman Jerome Powell told the House Financial Services Committee this week.  The problem is not that the other nations of the world will stop using the dollar as a means of exchange and finance, or a reserve asset. The problem is that the other nations of the world have no reason not to make free use of the global dollar.

The global role of the dollar as a "reserve currency" is an anomaly, the byproduct of two world wars that left all of the antagonists broke by the time of the Bretton Woods Agreement in July 1944. Choosing the fiat paper dollar as the default global reserve currency 80 years ago reflected the fact that America was the victor and possessed a viable currency  – and a nuclear arsenal – that gave Washington unchallenged economic leadership for half a century. 

Now the world is slowly migrating to a multilateral currency structure with gold and other precious metals serving as an independent reserve asset and store of value, as was the case before the First World War. What global currency will replace the fiat paper dollar? None. As this article is written, gold is now the second largest reserve asset for central banks after the dollar.

“The initiation in 2002 of the Shanghai Gold Exchange (SGE) was of great strategic significance, both for gold and the global monetary system,” notes veteran gold fund manager Henry Smyth in an interview in The Institutional Risk Analyst. “Now it is completely clear what happened.”

The markets have almost nearly clawed back the losses incurred since the start of the Trump Administration, but the growing pile of problematic assets is going to eventually force the Fed to cut interest rates – even as some inflation indicators are starting to move in the wrong direction.  

“With stock indexes virtually eradicating this year’s drawdowns, we’re getting close to the stage where FOMO and greed typically set in,” writes Simon White of Bloomberg. “That calls for caution rather than abandon as periods of greed often to lead to downside rather than upside in stock prices.”

One momentum situation that we highlighted earlier in the year is the GSEs, Fannie Mae and Freddie Mac, which are up 40% YTD on speculation about possible release from conservatorship.  We continue to think that the odds of actual release are still 50/50, especially watching the retreat of the Trump White House on many priorities in the “big beautiful bill.”  

We’d urge our readers to put sell orders underneath any positions in the GSEs, banks and nonbank financials in anticipation of a headline-driven pullback.  We expect Q2 2025 earnings to be relatively positive, but we also expect ST investors to take gains as reporting begins. We are profitable on our purchase of American Express (AXP), for example, but we are adjusting a sell order to reflect the gains. As you can see in the chart below, the banks shown in the Invesco KBW Bank ETF (KBWB) are outperforming the S&P 500 by 3x. 

We have little conviction behind our long positions in AXP and the SPX, thus the defensive recommendation in terms of sell orders. With credit pressures building in financials and across the credit markets, we are not wedded to any of these positions that may come under pressure due to rising levels of delinquency or simply profit taking.

Below are the top performers in our bank surveillance group as of today’s opening. Notice that JPMorgan (JPM) is now #10 and Goldman Sachs (GS), Northern Trust (NTRS) and Synchrony Financial (SYF) are catching up with sector leader SoFi Technology (SOFI).

Bank Surveillance Group

Source: Bloomberg (06/25/2025)

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