BAnk stocks and associated exchange-traded funds are off to their best start in a decade, as a more hawkish Federal Reserve has helped sustain the industry’s momentum.
Since the beginning of the year, the ETF SPDR S&P Bank (NYSEArca: KBE) increased by 7.5%, while the overall SPDR Financial Sector (NYSEArca: XLF) was up 4.2%. By comparison, the S&P 500 was down 1.4% year-to-date.
Bank stocks are enjoying the best start to the year in more than a decade after finishing their best annual performance since 2013, Bloomberg reports.
The KBW Bank Index, which tracks 24 of the largest U.S. lenders and serves as an underlying benchmark for the Invesco KBW Bank ETF (NASDAQ: KBWB), has gained around 10% so far this week, keeping pace with its biggest gain over five days to start a new year.
Investors are favoring bank stocks amid rising US bond yields on rising bets that the Fed could start raising interest rates as early as March, with more to come later this year.
A rising interest rate environment and improving lending growth in an expanding economy are “the two main catalysts for investors to become more bullish on bank stocks,” write analysts at Raymond James, including Wally Wallace and David Long, in a note.
This week, the rally in bank stocks also received an additional boost on Wednesday after the Fed’s final minutes showed policymakers discussing the possibility of a stronger economy and high inflation, which would force the central bank to raise rates earlier and faster than expected.
However, after the recent rise in bank stocks, some are warning against the group’s higher valuations.
âThe rush to grab the interest rate exposure has resulted in the super-regional names outperforming this week, and it’s just harder to see a lot of benefit from here,â Baird analyst told Bloomberg. David George. “The risk / return trade-off in the banking group is becoming somewhat unattractive.
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