ETF Insights| October 1, 2024
Financials underperformed in the month of September, but the bullish reversal pattern for the sector remains intact and we expect outperformance in October.
Price Action & Performance
XLF spent September consolidating absolute and relative gains from early July. Oscillator work is short of oversold levels but fit the signature of an accumulation point in a longer-term bullish reversal pattern. Despite the correction in price, the XLF has managed to outperform the S&P 500 over 3-month and 12-month timeframes which qualify as bullish scores in our model.
Outperformance is broad at the industry level with 4 of 5 GICS Industries outperforming the S&P 500 over the past 3 months. Insurance, Consumer Finance, Capital Markets and Diversified Services Industries have outperformed since July 1, while Banks have been a market performer.
At the stock level, our favorite names are FI, AXP, SYF, BX, GS, KKR, MCO, ACGL, AFL, AJG, BRO, HIG and PGR. However, unlike several other sectors, there are many other attractive charts beyond these within the sector.
We would also point out that Financials were devastated in Q1 of 2023. The bank run that closed SBNY and SIVB was a product of abrupt Fed policy manipulations that led to prolonged and elevated interest rate volatility. Financials potentially have a longer ramp of reflation still in front of them.
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. Investors have pivoted to expecting interest rate policy easing from the Fed. in the 2nd half of 2024 and the Fed confirmed resoundingly with an initial 50bp cut in September. We are seeing historical upside exposures start to assert themselves on the tape as interest rates stabilize in the near-term.
It remains to be seen whether interest rate adjustments from the Fed will be enough to unlock a very stagnant housing market, but that will be a key consideration to monitor for both the Consumer Discretionary and Financial sectors. Rates have gone down, but prices remain high and transactions are below trend there.
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 and easing regulatory hurdles for businesses. Interest rates remain a key pivot as broadening upside participation in the equity market may spark bets on a reemergence of inflation, but so far that concern is on the periphery.
Foreign policy in a new administration will likely have some bearing on Financial Sector performance as well. Isolationist policy which is favored by many in the MAGA conservative camp is inherently inflationary as it would likely continue disaggregation of the global supply chain and create barriers to trade. This has potential to put upwards pressure on interest rates and the USD. That would be a potential risk as we move forward. The Harris campaign has talked about expanding the child tax credit and making housing more affordable. This has potential inflationary and regulatory consequences as well if
In Conclusion
The XLF has consolidated to what looks like an excellent accumulation point. We have been constructive on the sector for some time now and continue our long exposure into October. Our Elev8 Sector Model continues with an OVERWEIGHT Position in XLF of +3.73% vs. the benchmark S&P 500
XLF Technicals
- XLF daily (200-day m.a. | Relative to S&P 500 | MACD | RSI )
XLF Relative Performance | XLF Industry Level Relative Performance | 3-Months
XLF Street Analyst Ratings and Price Targets:
Data sourced from FactSet
