Are You Prepared for Raising Rates?

October 11, 2021  |  Michael Reilly

The broader markets have been struggling amid inflation and interest rate fears.Mike Reilly Director of RiskManagement, Rowe Wealth Management

You can see it in the chart below – after peaking in early September, the S&P 500 has been in a downtrend that it’s been struggling to reverse.

But that does not mean all areas of the market are seeing selling pressures.

On the contrary – the Financial Sector is on a record-setting pace and is the second strongest sector in our sector matrix, thanks in large part to rising bond yields.

Inflationary pressures – caused by things like rising energy prices – help push bond yields higher.

Here’s where it gets interesting for investors…

Bank stocks are one of the main beneficiaries of rising bond yields and a steeper yield curve. That’s how banks make their money.

They borrow at the short end of the yield curve and loan based on the long end of the curve – profiting from the spread.

Here’s a way to visualize the difference between short-term and long-term yields. This is a chart of the yield curve.

This chart compares the yields between the longer 10-year Treasury Bonds and the shorter-term 2-year Treasuries.

In late 2019 where you see the arrow, there was no difference between the yields of the 2-year versus the 10-year. The yield curve was flat.

Financials, especially banks, can struggle to remain profitable in this environment.

After that low, the difference in yields started to rise sharply, which means a steepening curve. The long-dated yields are rising faster than the shorter-dated yields.

This, in general, is a positive for financials/banks.

Take a look at this chart of Financials, using the Financial Sector SPDR (XLF) as a sector proxy. The Financial sector just hit a new all-time high on its price chart.

In the next chart, you can see XLF is sitting at an important area where it has run into resistance in the past.

Investors will want to pay attention to this area because if Friday’s closing price can hold, it could signal the beginning of a new run higher for stocks in the financial sector.

It’s not only the broad Financial sector setting record highs, either…

Dig a little deeper into the industry groups that make up the Financial sector and you’ll see bank stocks in particular have seen substantial gains over the past four weeks.

The S&P Bank SPDR ETF (KBE) is nearing record highs as well.

And since its most recent low recorded on September 20, this bank ETF has been on a tear, gaining 14.96%.

Investors looking to profit in a world of rising rates will want to keep out a keen eye…

Because if they continue to rise, Financials – particularly bank stocks – will likely be a big winner.

Here are a few ways investors like you can consider playing the recent strength in financials.

Financial ETF Opportunities:

  • iShares U.S. Broker-Dealers & Exchanges – IAI
  • First Trust NASDAQ Bank – FTXO
  • iShares Regional Banks – IAT
  • Invesco S&P Equally Weighted Financials – RYF

Individual Stock Opportunities:

  • Bancorp – TBBK
  • Customers Bancorp – CUBI
  • SVB Financial Group – SIVB
  • Veritex Holdings – VBTX

Until next week, keep an eye on those yields… and safe investing!

PS: Are you looking for more than just a few potential plays or one-off stock opportunities? Are you looking to take away some of the stress of investing? To make the whole process easier, give us a call. We’re opening our doors to new investors who have portfolios valued over $500,000. If you’d like to schedule a free 1-hour consultation to review your portfolio, click here.

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