Seven years after American banks brought the global economy to its knees, stock investors want nothing more than to own them again now that the Federal Reserve is back to raising interest rates.
The country’s biggest financial stocks surged more than 5 percent in two days, an early payday for bulls who have piled in on speculation the end of zero-percent rates will stoke a profit revival. Securities tracking the industry have attracted $1.7 billion in the past month, the most among 12 sectors tracked by Bloomberg except energy.
Bulls are looking for something that has so far remained elusive -- a rally big enough to erase the stock market losses banks suffered in 2008, the worst year since the Great Depression. The group has been a favorite of global money managers for two months even as stress in the junk bond market evokes comparisons to the subprime meltdown.
The Fed hike “does provide the first wave of relief for the financials and so we have moved to an overweight position in the last two quarters in financials in part with this expectation,” said Leo Grohowski, who helps manage more than $184 billion in client assets as chief investment officer of BNY Mellon Wealth Management in New York. “This is welcome news for the financial sector.”
Fund inflows and the options market show the extent of optimism on banks at the end of an unprecedented stimulus campaign by the Fed. Since mid-November, money sent to stock ETFs such as the Financial Select Sector SPDR Fund has accounted for about a third of the total deposited to all sector funds, data compiled by Bloomberg show.
In the options market, more than 2 million contracts on the financial ETF, known by its ticker XLF, changed hands in the past six days. That’s the highest volume over any comparable stretch since April 2013, data compiled by Bloomberg show.
Traders are also less concerned about price swings in financial companies. The implied volatility for XLF versus an ETF that tracks the S&P 500 is 75 percent below a 10-year average, according to data compiled by Bloomberg on three-month options with exercise prices closest to current price levels.
Bank CEOs have been careful in recent months to tamp down any expectations that slow rate increases will markedly boost interest income. But Wednesday’s move is still important psychologically for consumers and executives, and for international confidence in the U.S. economy, Richard Davis, CEO of Minneapolis-based U.S. Bancorp, the nation’s largest regional bank.
“The Fed is one of the most trusted bodies in America,” Davis said in an interview after the decision. The central bank’s view that the economy can bear higher rates, “gives everyone permission to agree that we are now moving forward with the recovery and gives them permission to start thinking about feeling good about growth again.”
While practically every lender is rallying, gains have been led by regional banks, with companies from Fifth Third Bancorp to Regions Financial Corp. and M&T Bank Corp. rising at least 5 percent since last weekend. Among bigger banks, Goldman Sachs Group Inc. has climbed 5.5 percent in three days, the most since September 2013, while Morgan Stanley has risen 4.8 percent.
“Now you’ll see market preference for companies that are able to use this higher interest rate environment to boost their net interest margins,” said John Carey, a Boston-based fund manager at Pioneer Investment Management Inc., which oversees about $230 billion. “We’ll see which companies are really skillful, and which ones are also-rans.”