The Real Winners amid Rate Hike Expectations
Rally in bank stocks
The S&P 500 (SPX-INDEX) (SPY) and the Dow Jones Industrial Average (DIA) (DJI-INDEX) closed at record highs last week. The Federal Reserve indicated the possibility of another rate hike this year and plans to begin unwinding its $4.5 trillion balance sheet starting in October.
The Fed’s balance sheet mostly consisted of Treasury and mortgage-backed securities. Consequently, the yield on the ten-year Treasury note rose to 2.29%—the highest in a month—while the yield on the two-year bond moved to its highest level since November 2008. The rise in yield bodes well for banks since they can charge customers higher rates on loans, which should boost their profitability.
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After the Fed’s announcement, financial stocks posted strong gains. The S&P 500 Financials Index rose ~2.6% last week, while the Financial Select Sector SPDR Fund (XLF), which tracks the performance of the financial sector of the S&P 500 (SPX-INDEX) (SPY), gained 2.7%. The Vanguard Financials ETF (VFH) rose 2.7%.
The possibility of another rate hike in December caused a sharp rally among major bank stocks. Shares of major banks including Wells Fargo (WFC), PNC Financial Services (PNC), U.S. Bancorp (USB), Morgan Stanley (MS), JPMorgan Chase (JPM), and Citibank (C) rose up 5%, 4.1%, 3.6%, 3.5%, 3.5%, and 3.4%, respectively.
The S&P Insurance Select Industry Index (SPSIINS) rose 0.92% last week, while the SPDR S&P Insurance ETF (KIE) and the iShares Dow Jones US Insurance Index ETF (IAK) gained 0.86% and ~1.4%, respectively.