(Nasdaq) While spiking Treasury yields sent the Nasdaq Composite tumbling over the past month, the banking sector has continued to outperform.
The SPDR Regional Bank ETF (KRE) finished at a record high on Monday, adding roughly 2.6% to begin the week, as climbing rates and faster economic growth are seen as benefitting smaller financial institutions levered to the domestic economy.
KRE is up 27% over the last couple of years, with the last few weeks of market action witnessing investors increasing bets on regional banks and moving out of riskier risky assets and technology stocks.
“Bank stocks are on a tear this year, boosted by reopening optimism as the vaccine rolls out across the U.S.,” reports Felice Maranz for Bloomberg. “Investors are betting that more lending, more deals and more consumer spending are yet to come. The potential for fresh stimulus and infrastructure and other massive projects should lift their shares. Even so, while higher yields in a low-interest-rate environment are good for banks, sharp jumps have rattled global markets this week.”
While other sector like energy and housing have seen strong performances, banking has seen healthy performance over the last couple of years, despite volatility.
"The recent market volatility has been largely a function of a painful underlying market rotation out of high Momentum and expensive Growth stocks as rates and inflation expectations underwent a sharp adjustment," said JPMorgan strategist Dubravko Lakos-Bujas in a recent note to clients. "We see higher rates largely as a function of earlier and stronger than expected economic recovery and supportive of our positive equity outlook."
Mike Wilson, equity strategist at Morgan Stanley, wrote in a note to clients this weekend that the market's current rotation "should be expected at this stage of a recovery from recession."
"After the big initial surge, the stock market tends to consolidate as interest rates rise and P/Es compress," Wilson added. "This is why our year-end target of 3,900 for the S&P 500 is toward the lower end of most sell-side strategists. The bull market continues to be under the hood, with value and cyclicals leading the way. Growth stocks can rejoin the party once the valuation correction and repositioning is finished."