As was widely reported, financial services stocks and the related exchange traded funds were epic disappointments in 2018. Last year, the Financial Select Sector SPDR (NYSEArca: XLF), the largest ETF tracking the sector, slumped 13% even as the Federal Reserve boosted interest rates four times.

The new year is still in its early stages, but the sector is rebounding. As of Thursday, Jan. 24th, XLF was up 8.30% year-to-date. Some market observers believe that rally is credible and could prove durable.

“Unfortunately, short-term interest rates increased more than long-term interest rates last year, flattening the yield curve and curbing financials’ profitability,” said State Street in a recent note. “In addition, attractive relative valuations combined with a less burdensome regulatory environment at the start of last year also led investors to aggressively overweight the financial sector.”

When the sector struggled against the backdrop of short-term rates rising faster than long-term rates, investors grew anxious and rapidly departed funds like XLF.

“When things didn’t pan out as they planned, investors lost patience with their financial sector positions, withdrawing nearly $9 billion from financial sector exchange traded funds (ETFs)—the greatest outflow of the 11 economic sectors,” said State Street.

Better Things In 2019

Earnings seasons has been solid for the financial services sector and the flatter yield curve could provide the foundation for more upside for bank stocks.

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