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Bank Stocks Rise Due to Expectations of a Rate Hike

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Banks continue to rise

It’s important to note that 2016 has been a rough year for the financial sector. Banks entered 2016 expecting four rounds of interest rate hikes. However, things didn’t turn out in their favor. Most banks expect earnings to improve in the fourth quarter because trading activity picked up. Pressure from credit costs eased due to better credit quality. For banks, it could result in less need for energy-related loan loss reserves, stabilizing commercial net charge-offs, and relatively stable consumer credit costs. Banks that have been in the spotlight since the start of 2016 might see easing pressures in the results for the upcoming quarter. Most bank stocks rose well past their “buy” range in November. They got a boost from expectations of fewer regulations following Trump’s victory, higher inflation, economic growth, and Fed rate hikes next year. Currently, markets priced in a rate hike by 25 basis points as well as higher economic growth in 2017. The federal fund futures indicates a 97% chance of a rate hike by 25 basis points. If the Fed chooses not to act, we might see a sharp sell-off in banks.

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Since the presidential election on November 9, shares of the Financial Select Sector SPDR ETF (XLF) rose 13.3% led by financial heavyweights such as Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), and Citigroup (C). Wells Fargo stock rose 23%, while Bank of America, JPMorgan Chase, and Citigroup rose 33%, 21%, and 19.8%, respectively.

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