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Should Investors Consider Selling in May?

PART:
1 2 3 4 5
Part 2
Should Investors Consider Selling in May? PART 2 OF 5

Does the Financials Sector Sweat the Summer More?

Market Realist Partner Insight: What's this? Market Realist Partner Insights is a co-produced report between prominent thought leaders in financial services along with further analysis by Market Realist research analysts. The views of the thought leader are clearly delineated from the analysis of Market Realist analysts, however, we provide a combined report for convenience to our readers.

Direxion

Financials sweat the summer even more

Surprisingly, the big recent winner, the Financial Sector, fares even a little bit worse in the summer. Take a look below:1

Does the Financials Sector Sweat the Summer More?

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During the summer the average monthly return is -0.16%, worse than that of the S&P 500 as a whole and a bigger spread versus their own full-year returns of 0.70% per month.  They do follow the same seesaw pattern though: down in June, back up in July, and then back down in August.  The interesting thing here is that how much they swing month to month makes leveraged ETFs possibly even more valuable to investors.  Often though, the trend is your friend, and Financials have been in the strongest uptrend since the election. Recently though, they have underperformed with rates dropping.

Market Realist

Financials have been in the strongest uptrend since elections

The big winner since the US elections has been the financial sector, which is up 14% as of May 8, 2017. President Trump’s plans to dismantle the Dodd-Frank Act and replace it with new policies to create jobs and promote economic growth certainly have benefited the financial sector.

With the Russell 1000 Financial Services Index up 12% since the elections, the Direxion Daily Financial Bull 3X ETF (FAS) has returned 41% as of May 8, 2017, as depicted in the chart above. The Direxion Daily Financial Bull 3X ETF seeks daily leveraged investment results and aims to magnify the daily performance of the Russell 1000 Financial Services Index.

The Fed’s decisions can drive the financial sector further

As the figure above shows, the financial sector tends to return -0.16% on average during the summer months. However, under Donald Trump’s presidency with lighter regulations and rising interest rates, the financials sector can recover from its losses. After increasing interest rates by 25 basis points to the range of 0.75%–1% in the March meeting, the Fed kept the benchmark rate constant at its May meeting. The Fed predicts two additional quarter-point rate increases this year. Cleveland Federal Reserve President Loretta Mester said, “A gradual upward path of rate hikes will help prolong the expansion, not curtail it.” Higher interest rates will drive the financial sector’s margins and earnings growth.

Better economic growth driving lending activity along with a steepening yield curve will promote the financial sector (XLF).

  1. Past performance is not indicative of future returns.
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