Bank stocks and sector-related exchange traded funds are beginning to outperform on growing optimism over a recovering U.S. economy.
Over the past month, the SPDR S&P Bank ETF (NYSEArca: KBE) increased 12.4% and the broader Financial Select Sector SPDR (NYSEArca: XLF) advanced 12.2%. Meanwhile, the S&P 500 rose 10.4%.
The S&P 500 bank index has also jumped close to 10% so far this month after a two-day rally of 15% last week, Reuters reports.
Banks are typically more sensitive to consumer and business spending so the stocks were among the heaviest hit during the coronavirus-related economic slump. Furthermore, as U.S. Treasury yields started to inch higher, banks also picked up pace.
More recently, bank stocks have been strengthening after U.S. May private payrolls declined less than expected, which suggests that the layoffs are slowing as businesses reopened and states begin to ease stay-at-home restrictions.
The underperforming financial sector has also attracted bargain hunters looking for more value plays, especially after the run up in the growth style.
“There’s optimism things will be better a year from now. And because banks have trailed just about everything else in the market they’re being dragged up,” Rick Meckler, partner at Cherry Lane Investments, told Reuters.
“A lot of the negativity is reflected in current valuations, which is why there’s a lot of upside compared with other industries” Ryan Lentell, portfolio manager at Manulife Investment Management, told Reuters.
Even after the recent outperformance in the financial sector, the S&P Bank Index is still one of the biggest industry underperformers this year, falling 29%, compared to the 3% dip for the S&P 500.
Furthermore, Michael Cronin, investment manager for US equities at Aberdeen Standard Investments, warned that dividends could be suspended if the Federal Reserve implements greater capital reserve requirements after a stress test.
“Banks seem optimistic they’ll be able to continue to pay dividends and they’re advocating for paying dividends but the question is still out there and it’s still weighing on valuations,” Cronin told Reuters.
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