The financial services sector, the second-largest sector weight in the S&P 500, has been under pressure since the Federal Reserve unveiled its first interest rate increase of 2017 earlier this week. Even with that rate hike, rate-sensitive regional bank stocks and exchange traded funds have been faltering.
For example, the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, dropped 6.7% last week. Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
To that end, the Fed’s most recent rate increase, its third in the past 15 months, resulted in disappointment for KRE and regional bank stocks.
“From a price analysis perspective (chart reading), regional banking stocks are (over)due for a correction. Uncoincidentally, that correction started as the sector reached 60 points in the KRE ETF (regional banking stocks), after the sector doubled,” according to ETF Daily News.
Unfortunately for some that are bullish on the financial service sector, with the Fed looking dovish even after its recent rate hike, politics might be the lone remaining catalyst for the sector for a while and that could weigh on regional banks that were hoping for a more hawkish Fed.
The problem with that scenario, as was seen with financial services ETFs last week, is that markets are growing concerned with the Trump Administration’s ability to push through some of the bigger objectives on its legislative agenda, including tax reform and rolling back the Dodd-Frank Act. Those two goals are widely seen as positives for bank stocks.
Regarding KRE, “either the breakout point becomes support, and regional banking stocks go higher from that level. In that scenario, we expect yields to rise again, and even breakout from the very long term downtrend. That could be hugely bullish for banks, and the financial sector could break out big time,” according to ETF Daily News.
Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Trump Administration.
For more information on the financial sector, visit our financial category.