It may be time to take the money and run on financial stocks this year, with a December interest-rate hike increasingly looking baked into their prices, according to one newsletter.
“At this point in time, it appears that a December interest rate increase is about 80% priced into the market and we do not see much more upside for the financial sector over the next few months,” wrote newsletter editor Adam Kobeissi, as he discussed his Kobeissi Letter’s chart of the week.
Last week’s September payrolls report showed job losses of 33,000, the first fall since 2010. However, economists expect the Federal Reserve will shrug that off and keep moving ahead with its plans to hike in December. The central bank sees plenty of evidence the economy is on track, they said.
CME Group’s FedWatch tool shows there is a 92% chance of an interest-rate increase in December. Higher interest rates tend to boost a bank’s net interest margin — the difference between what it charges on long-term loans and its own borrowing costs. That, in turn, can lift earnings for the bank.
Explaining his bearish view, Kobeissi pointed out that the SPDR Financial Select Sector ETF XLF, -0.42% is up 8.44% over the last month and 36.53% over 12 months. On a technical basis, he said that ETF looks to have topped out at the $26.46 level, and he now expects it to start moving lower.
The ETF’s intraday peak on Friday was at $26.46, and that mark also coincides with a trend line that has served as a limit, as shown in Kobeissi’s chart below.
Financial stocks will be in the spotlight this week as third-quarter reporting season starts up. BlackRock Inc. BLK, +2.24% will report on Wednesday, followed by J.P. Morgan Chase & Co.JPM, -0.63% and Citigroup Inc. C, -2.38% on Thursday and Bank of America Corp. BAC, -0.99% Wells Fargo & Co. WFC, -0.33% on Friday.
Analysts expect banks to report tepid growth across nearly all their business lines, hurt by weak loan growth and a modest rise in net interest margins, to name a couple of issues.