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Will Financials Recover Next Week?

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US markets saw wild swings

US stocks saw wild swings last week. Major indices fell more than 5% and stoked fear among investors about prolonged weakness in the markets. The Dow Jones Industrial Average (DJI-INDEX) (DIA) saw a cut of 1,330 points or 5.2% before it closed at 24,190.90. The S&P 500 Index (SPX-INDEX) (SPY) dipped 5.2% to 2,619.55, while the NASDAQ Composite (COMP-INDEX) (QQQ) fell 5.1% and closed at 6,874.49.

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Financials fell the most

With broader markets posting a sharp drop, the financial sector saw even more losses. The S&P 500 financial index fell 5.80% and closed the week at 458.95. All of the major financial ETFs were in the red. While the Financial Select Sector SPDR ETF (XLF) plunged 5.7%, the Vanguard Financials ETF (VFH) fell 5.5%. Wells Fargo (WFC), which had huge penalties from the Fed, was the top loser last week with a loss of 12.4%. Other major laggards included Morgan Stanley (MS), U.S. Bancorp (USB), Bank of America (BAC), and Citigroup (C) with losses of 6.0%, 5.5%, 5.1%, and 4.3%, respectively.

Rising bond yields and a more hawkish Fed could lead to interest rates rising faster than expected and spook the stock markets. However, higher rates could shore up banks’ earnings. Higher rates help expand banks’ net interest margins. Banks’ loan growth is also expected to remain buoyant due to strong consumer confidence. However, financial stocks’ fortune is linked to broader markets. Unless the broader markets recover, financials probably won’t see a rebound despite rising yields.

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