Financial’s Surprise Post-Election Surge…and Fall Back to Earth

December 17, 2018  |  Michael Reilly

No broad sector was a bigger beneficiary of Donald Trump’s surprise victory in the 2016 Presidential election than Financials.

Following the election, the sector moved swiftly up from the #8 ranked sector on a relative strength basis.

In just 8 days, From November 3, 2016 to November 11, 2018, the Financial sector rocketed to #3. You can see how this is mirrored by the XLF (our financial sector proxy) in the chart below.

Demand remained strong for nearly two years, keeping Financials ranked the #1 or #2 top relative strength sector in the U.S.

Investors savvy enough to recognize the momentum Financials were enjoying and who invested in any of the ETFs in the chart above were rewarded with eye popping returns of 48% to 53% over that stretch of time.

But, successful investing is about adapting to what markets throw at you…

And, as fear and volatility reemerged for the second time in 2018, the Financial sector began to crack, slipping one spot to #3 in mid September.

As we moved into early October, it became apparent large investors were losing their appetite for the sector and Financials dropped again to #4.

On December 7, 2018, the momentum that once dominated the sector weakened sufficiently to push them out of the top four for the first time in more than two years as sellers took control of financial-related stocks.

All that selling has sent prices plummeting in XLF. Banks, Financial Services and Insurance Companies comprise the broad financial sector, and the banks and bank ETFs that had previously fattened the pockets of investors were now taking a beating.

We’ve just witnessed all three major U.S. stock indexes fall more than 10% from their recent highs, enough to be considered a market correction.

Things are looking even worse for financial stocks. Using XLF as our sector proxy, the sector is down close to 20% off its highs of earlier this year, putting it near bear-market territory.

According to during just the last month (11/14/2018-12/14/2018), the iShares Regional Bank ETF (IAT) is down 11.07%, the SPDR S&P Regional Bank ETF (KRE) has dropped 10.28%, and the SPDR S&P Bank ETF (KBE) has shed 9.83.%.

Individual names haven’t fared better, with Wells Fargo (WFC) down 10.76%, JP Morgan (JPM) giving up 6.56%, and Goldman Sachs (GS) losing 14.33% since November 14.

The deterioration has been swift and painful.

Although Financials may be oversold within the rest of the U.S. market, it’s clear that momentum has shifted away from the sector. (see last Friday’s Adapt: Utilities).

Investors will want to keep an eye on sector relative strength and momentum to see if the Financial sector will regain any of its previous dominance or if the shift in sector strength is long term in nature.

If that is indeed the case, success may hinge on your ability to shift with a changing market climate.

If you’re still invested in Financials and you’re feeling like you need to take a look at your portfolio and consider rebalancing, feel free to make an appointment with an advisor at Rowe Wealth.

We’d be happy to analyze your portfolio to measure how much “strength” you’re currently holding, as well as analyze your portfolio’s inherent risk to ensure you’re not at risk of losing more than you can afford.

Click here now to see available call times.

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