The U.S. stock market is showing strong complacency amid trade fears, with the S&P 500 and Dow Jones hitting new highs. While most of the sectors have been rallying, a few are lagging behind and financials is one of them. However, this seems to be the right time to get into this sector stocks and ETFs.
Below, we have highlighted some strong reasons for the outperformance of the broader sector:
Rising Rates
Rates have been on the rise this year with 10-year Treasury yields hovering above 3% and 2-year yields near a decade high of 2.8%. The upward trend is likely to continue given that the escalating tit-for-tat tariff trade will result in higher consumer price for products, stoking inflation.
Trump has imposed the second round of tariffs of 10% on $200 billion worth of Chinese goods starting Sep 24. The taxes will be increased to 25% effective Jan 1. In retaliation, China slapped a tariff of 10% on more than 5,000 American products worth $60 billion. Trump’s new tariff will be in addition to $50 billion that is already in place with a 25% duty. China has retaliated with tariffs of an equivalent amount of U.S. exports. Apart from this, Trump also threatened a third round of tariffs on another $267 billion of Chinese imports on a short notice, which would mean levying duties on nearly everything China exports to the United States.
Additionally, the Fed has raised interest rates twice this year and is expected to make a third-rate hike as soon as next week. One more hike is expected in December. According to the CME Group’s FedWatch tool, market expectations for a rate hike this month are more than 90%.
A rising interest rate scenario is highly profitable for the financial sector as it will expand profits of banks, insurance companies, discount brokerage firms, and asset managers.
Trump Action
Trump has rolled back some financial regulations, dismantling the Dodd-Frank Act, which was enacted in the aftermath of the financial crisis and has crimped some of the business lines of the banks. Easing of regulations will undoubtedly increase profitability of the companies, particularly banks, and boost dividends and buybacks.
