The Financial Sector after the Rate Hike: What’s to Come
Financial sector performance
The financial sector is to poised for a better performance following the Fed’s March 15 interest rate hike and higher interest rate expectations for 2017. Banking stocks are expected to benefit from the steepening yield curve this year.
The Fed increased the benchmark rate by 25 basis points on March 15, bringing the rate up to a range of 0.75%–1%, but financial stocks dropped slightly after the Fed’s announcement because the tone following the Fed’s meeting sounded more dovish than markets had expected.
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Financial sector performance in 2016
The financial sector has been on the rise since the second half of 2016. In November, the Fed announced three likely hikes for 2017, and so markets presumably began to absorb rate hike expectations into the pricing of financial stocks at that time.
As the graph above shows, the financial sector (XLF) (VFH) (KRE) (KBE) has gained about 10% since the Fed’s last announcement in 2016. If the Fed hikes the interest rate again, financial stocks are expected to continue rallying in 2017.
Reasons for the upswing in the financial sector
The financial sector is expected to benefit from the rising interest rates as these will boost company margins and as a steeper yield curve helps boost revenues. A rising interest rate also means improvements in the economy and support for the financial sector. Apart from the rising interest rate, the financial sector also expects to benefit from the Trump administration’s policy decisions, including fiscal stimulus and deregulation.
In the next and final part of this series, we’ll assess the impact of the latest interest rate hike on real estate.