Financial stocks have outpaced the broader markets in other periods before the Federal Reserve hiked rates. As the market ready itself for Fed tightening, investors can track the sector through related exchange traded funds.
According to Bespoke Investment Group, in the three policy changes over the past 21 years, the S&P 500 index has averaged a gain of almost 13% in the nine months prior to the first rate increase, whereas financial shares have outperformed all industry group with a 18% rally, reports Michael P. Regan for Bloomberg.
While still falling behind the S&P 500 year-to-date, the Financial Select Sector SPDR (NYSEArca: XLF) has moved ahead of the broader market over the past few months. XLF gained 4% over the last three months and 3.4% over the past month while the S&P 500 rose 3.1% over the last three months and 1.6% over the past month. [Financial ETFs: Banks Generate Near-Record Profits]
American banks with global operations are “benefiting from strong relative economic strength in the U.S. and the U.S. dollar,” Frederick Cannon, director of research at Stifel Financial Corp.’s Keefe, Bruyette & Woods unit, said in the article. “Further, they benefit from the expectation that the Fed will raise interest rates next year while monetary policy will remain easy in Europe and Japan.”
XLF tracks a range of financial stocks, including a 37.1% weight toward banks. Over the past month, banking sub-sector-specific ETFs have also outperformed the S&P 500, with the SPDR S&P Bank ETF (NYSEArca: KBE) up 3.7% and the SPDR S&P Regional Banking ETF (NYSEArca: KRE) 3.1% higher. [Not Believing Yellen, Regional Bank ETF Pops]
According to KBW, earnings estimates were raised 38 times for financial stocks last week. Analysts anticipate that third-quarter earnings will rise by 7.9% for diversified financials in the S&P 500 and 3.9% for banks.