The Financial Select Sector SPDR (NYSEArca: XLF) is down more than 17% year-to-date, making it the worst performer among the nine legacy sector SPDR exchange traded funds, but the financial services sector’s early 2016 doldrums could be giving way to a buying opportunity for prescient investors.
Contributing to the weakness in the bank sector, traders may have been unwinding bullish bets in the run-up to the Federal Reserve’s first rate hike in December, reports Stephen Foley for the Financial Times. Investors hoped that higher rates would allow banks to capitalize on wider net interest margin – the difference between deposit rates and lending rates, but the global economic uncertainty has weighed on prospects for a quick Fed rate hike schedule.
Bank stocks surged Friday after JPMorgan & Chase (NYSE: JPM) CEO Jamie Dimon bought $26.6 million worth of the company’s stock after the banking sector rout, reports Hugh Son for Bloomberg.
JPM jumped 7.7% Friday.
“David Seaburg, head of sales trading at Cowen and Co., said the tumble has created a good buying opportunity for investors looking to bet on the banks,” according to CNBC.
While U.S. banks have some exposure to over-leveraged oil companies, the level of exposure to the distress energy industry is not up to the scale of the U.S. housing market that triggered the 2008 run. Previously, the Federal Reserve’s decision to hold off on an interest rate hike, ongoing economic weakness and concerns over trading revenues have weighed on the financial sector’s outlook.
Markets may be trying to discern shapes in the shadows where there are none, overreacting to the recent spate of economic weakness. For instance, banking analyst Mike Mayo argues that Wall Street banks are trading at “recession prices but no recession.” On a price-to-tangible book value, banks have dipped to levels below pre-financial crisis, and some bank stocks are now trading below book value.
“Within the financial sector, bank names have fallen 23 percent this year. As stocks dropped 1 percent on Thursday, banks saw even more pain, falling more than 4 percent even as major lenders have traded below their tangible book value,” according to CNBC.
Financial Select Sector SPDR
