Financial Stocks in U.S. Seen Following ‘Pop, Then Drop’ Pattern

S&P 500 Banks vs. S&P 500

Financial stocks are poised to “pop, then drop” in the U.S. as the Federal Reserve moves toward higher interest rates, according to Gina Martin Adams, an equity strategist at Wells Fargo Securities LLC.

As the attached chart illustrates, the “pop” may be happening already. The chart compares the performance of the Standard & Poor’s 500 Banks Index with the S&P 500 since Jan. 15, when the industry gauge set this year’s low.

Banks recorded the biggest gains among 24 industry groups in the S&P 500 from Jan. 15 through yesterday, as their index climbed 18 percent. Insurers and diversified companies also bolstered the S&P 500 Financial Index, which rose 7.6 percent during the period, while real-estate shares fell.

“Investors should expect this near-term ‘pop’ for financials to continue, but be short-lived,” Martin Adams wrote in a June 5 report. The New York-based strategist cited swings in the stocks since the 1980s as the Fed prepared to begin raising rates and then followed through.

Financial shares tend to do relatively well before the central bank takes action, the report said. She cited a wider gap between financing costs and lending rates, tied to higher Treasury yields, and the prospect of greater demand for loans. The rate gap narrows as the Fed proceeds, which slows earnings growth “a bit more than expected,” she wrote.

Because of the potential for financial stocks to drop, investors ought to give them less weight than the industry’s share of market indexes would suggest, Martin Adams wrote. The group accounted for 16.5 percent of the S&P 500’s value as of yesterday, according to data compiled by Bloomberg. She rated banks and securities firms more highly than insurers and real-estate companies.

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