The once-hot financial services sector, the second-largest sector weight in the S&P 500, rapidly turned cold in the face of some dovish commentary from the Federal Reserve earlier this month. For example, the Financial Select Sector SPDR (NYSEArca: XLF) is off 4% over the past month.
The SPDR S&P Bank ETF (NYSEArca: KBE), which focuses exclusively on bank stocks, has been even worse, slumping 7.3% over the past month. Those data points indicate that investors considering financial services stocks and the related ETFs might have to exercise some patience.
The financial sector is getting hit by a double whammy as more are growing concerned over Trump’s ability to deliver on promises and yields on Treasury bonds pulled back.
U.S. equities have been rallying since the election on hopes and optimism that the new Trump administration would enact pro-growth policies to fuel the high-flying market valuations. However, some traders and investors are expressing concerns that the Trump trade is overbought, which makes the equities market vulnerable to quick turns.
“I think the key here is being patient, and I think it just needs some time. I think you want to see it carve out that base, but come second half of the year, we do think financials should continue to do well. So a little bit more neutral, near term,” said Oppenheimer’s head of technical analysis, Ari Wald, in an interview with CNBC.
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 Donald Trump administration.
The Trump administration’s expansionary policies would be especially beneficial for banks since the segment is sensitive to the overall economy. Moreover, the expansionary policies have fueled bets of increased Federal Reserve interest rate hikes to rein in a potentially overheating economy and rising inflation, which further supports lending revenue and their bottom line among bankers and insurers.
“In the long term, however, he is more constructive. Wald sees deregulation as a plus for the financials, along with the belief that ‘economic vitality’ will become apparent in 2018 as the Federal Reserve is expected to raise interest rates, which will ‘bode well over the next three to five years for the financials,’ according to CNBC.
Financial sector valuations still look relatively cheap, compared to the broader market. The sector’s valuations are still about 25% below the average since the early 1990s.
For more information on the financial sector, visit our financial category.