Despite and a rocky 3-month period, starting in late February/early March, the financial sector has really taken a positive outlook over the past ~month and some signs point to a continuation of this recent success.
About two weeks ago, banks underwent a stress test to determine their ability, under current conditions, to deal with an economic crisis. With areas of focus ranging from “regional geopolitical turmoil and global slowdown” to something as simple as “loss in confidence in banking system,” the IMF reported that the financial sector passed this stress test and is, with a grain of salt, “ready” to take on the burden of a financial crisis.
As the graph above shows, the financial sector (XLF) has underperformed broader markets (SPY). However, financials have surged over the last few weeks. Financials have soared 8.5% in the last two months compared to a 3.9% increase in the S&P 500 Index. The rate hike in June and the possibility of deregulation have supported financial stocks (IYF).
US banks (KRE) did relatively well in the recent stress test conducted by the Fed. The test results were released on June 22. They show that the banks that were under the microscope have enough capital to make it through, as described above. Bank losses are estimated to be $493 billion in the sternest scenario and are likely to be $322 billion in the less severe case.
The results meant that this was the third consecutive year banks met all the Federal Reserve’s standards. The results came as the Trump administration is looking at abolishing some of the Dodd-Frank regulations, which we’ll discuss in the next part of this series.