XLF Financials SPDR Outlook—A steadily improving Banking Industry sets the table for XLF success in June
Price Action & Performance
XLF has slowly been building back value after the disastrous bank runs of early 2023. In April, XLF printed a new all-time for the SPDR while also registering a new 52-wk relative-high vs. the S&P 500 Index. This unremarkable but steady outperformance from a sector that is out of the limelight is usually a sign of sustained improvement. May saw some mean-reversion which has left the XLF in a good intermediate-term trend and offering a nice tactical entry point as June trading gets under way. Consumer Finance stocks like COF and AXP have been leading along with Banks in 2024 headlined by JPM and WFC. Asset Managers and Capital Markets stocks have been a mixed bag while the Insurance Industry has been stable. Overall, the sector looks constructive without being burdened by high expectations.
Economic and Policy Drivers
Lower inflation readings have helped reflate many bank balance sheets which had been over-indexed to the long end of the curve back in 2022 when the Fed. was telling us nice stories about transient inflation and no expected rate hikes. Now that inflation is at least at a stable level with potential to further ameliorate, Banks are being let off the mat. Any rotation away from Tech/Growth/Mega Cap. leadership would likely redound to the benefit of all sectors, but in the meantime, Financials will likely benefit from any momentum the Trump campaign can gain as election season ramps given his legacy of cutting taxes for the wealthiest. Interest rates remain a key pivot with the current levels coinciding with decreased demand for mortgages in a housing market that remains tight. Consumer debt defaults will be a series to watch as interest rate burdens push more lower income households to borrow.
How Can XLF Help?
XLF offers market weight exposure to several industries that are often hard to differentiate at the stock level including Banks, Investment Banks and Brokerage Houses, Asset Managers and Insurance stocks, Rating Agencies and Exchanges. It has a large Value component which typically does well when inflation is on the rise, and it has been out of favor for most of the past two years which sets the table for upside surprise as expectations and sentiment have been tepid for some time. Further inflation pressures would likely force more capitulation away from big Growth Sectors and would likely benefit a wide swath of Value stocks including the many within XLF. If the economy shows resiliency, we could see continued strength in asset managers (BX, BLK), brokerage (SCHW), Consumer Finance (COF, AXP) and others. XLF offers exposure across these areas.
In Conclusion
The XLF has improved steadily over the past 9 months. And after a bit of a stumble in May relative to the S&P 500 it looks to be in a very constructive position for June. Our Elev8 Sector Model debuts with an OVERWEIGHT Position in XLF vs. the benchmark S&P 500 of +1.10%
- XLF daily (200-day m.a. | Relative to S&P 500)
- Relative curve is back to uptrend channel support marking a good entry point in an improving longer-term trend
