How the Financials Sector Could Perform This Fall

Direxion - Author

Sep. 20 2017, Published 9:59 a.m. ET


Could financials make us the teacher’s pet?

Financials have had a decent year with the S&P500 Financials Index up 6% year-to-date or YTD. But recently, they’ve been struggling. At this point, there seems to be no Dodd-Frank repeal legislation in the works, and the ten-year yield has dropped from 2.5%+ to the low 2% range. So, while there seems to be plenty that could go right for these stocks—rates could go up, regulations could ease, or the economy could reaccelerate—right now nothing seems to be going very well. And historically, these stocks are a bit of a mixed bag from a return perspective from September to December in the last ten years. So do you pick up FAS Financials (3X Bull) or FAZ Financials (3X Bear) or even Regional Banks DPST (3X Bull) or WDRW (3X Bear), which have had a much tougher year? See the YTD performance below.

Source: Bloomberg. Past performance does not guarantee future results.

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Back-to-school shopping can be rewarding

With sweater weather coming up and everyone back in school, it’s a great time to reexamine your investment strategy through the end of the year. Should you look at energy, the worst performer of the year so far? There are many reasons to like the sector, but OPEC’s struggle to keep supply low has been a big issue. Will cooler temps and lower inventories help? Or should you focus on the financials, a sector with lots of potentials but also headwinds right now? Or finally, should you look at the sector everyone uses into the holiday season—the transports? Whatever sector you choose, and whichever direction your market analysis takes you, Direxion has plenty of leveraged ETFs to get you back to school in style.

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Is financials sector going in the right direction?

The financials sector has held a pretty sweet spot since the victory of President Trump. President Trump’s proposal to abolish the Dodd-Frank Wall Street Reform and Consumer Protection Act and replace it with new policies benefitted the sector. As of August 31, the financials sector, as tracked by the Financial Select Sector SPDR Fund (XLF), has risen 24% since elections.

The Direxion Daily Financial Bull 3X ETF (FAS) aims to magnify the daily performance of the Russell 1000 Financial Services Index. It has returned 24.1% YTD as of August 31, catching up with the S&P 500 3X Bull (SPXL). The 2Q17 earnings season for the financial sector was positive, further driving returns.

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The Federal Reserve increased rates twice this year, once in March and once in June. Economists expect that another rate hike in December will depend on the health of the economy, especially the inflation rate. A hike could also depend on the implementation of policies by the new administration to boost the economy and tighten the labor market. Joshua Shapiro, chief economist at MFR, stated after the July FOMC meeting that a December rate hike would only be possible if the inflation rate picks up. The financial sector’s earnings growth and return upside will largely depend on rate hikes and regulation changes from the Trump administration.

So what investments should go in your shopping basket for the holiday season?

As we discussed in this series, out of the three sectors, financials seems to be doing pretty well. However, the expected regulatory changes and rate hikes could lead the sector in a different direction. Energy was at its worst this year. However, historical returns for energy during the holiday season justify some optimism. Lastly, the transportation sector tends to be the healthiest sector during the holiday season. Overall, the sector’s performance will depend on how regulatory changes take shape, future rate hikes, and on an improving economy. No matter what happens, Direxion offers investors a wide range of leveraged ETFs for each sector to choose from this holiday season.

Standardized performance as of June 30, 2017 


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