The Financials sector is setting new all-time highs.
It’s been more than two years since US equities began a bear market and 1 year since the collapse of Silicon Valley Bank sparked a panic that nearly upended the entire banking industry. Last March, everyone was scrambling to become experts on the accounting intricacies of held-to-maturity securities and the extent of unrealized losses on bank balance sheets. Even now, there are widespread concerns about the lasting impacts of the ongoing collapse in commercial real estate values.
Despite all that, the ‘crisis’ was over almost as soon as it began. From the March 17th, 2023 lows to today, the Financials have outperformed the S&P 500 as a whole and trailed only the Communication Services and Information Technology sectors.
Risks to the regional banks are no doubt worth keeping an eye on, but as a group, they continue to hold up remarkably well. Even when negative NYCB headlines were running rampant earlier this year, the S&P 500 Regional Banks sub-industry never collapsed below last summer’s highs. Now, it’s setting new 52-week highs.
That doesn’t mean we have to be going out and buying a bunch of regional banks. As an industry, they aren’t showing any relative strength when compared to the rest of the Financials sector.
But the simple fact that one of the most troubled areas of the market isn’t falling is evidence of the underlying health across the equity landscape.
In other words, this is a bull market.
And in bull markets like this, most stocks tend to go up. Nowhere is that more true than in the Financials sector. Today, 94% of S&P 500 Financials sector stocks are trading above a rising 200-day moving average. Other value-oriented sectors - Energy, Industrials, and Materials - aren’t far behind.
Whether or not value stocks continue to outperform really comes down to the chart below. The ongoing retest of the 2020-2021 highs for the Russell 1000 Growth to Value ratio has big implications for which sectors lead going forward. A successful retest here would mean we should put renewed attention on AI and mega-cap growth names that have dominated the bull market thus far.
A failure, though, and we could find ourselves at year-end talking about the dominance of Energy and Financials stocks in 2024.
That would fit with a bullish resolution from this year-to-date consolidation for the Financials relative to the S&P 500. The ratio below is above its 200-day moving average and found support at a key, one-year rotational level earlier this year. A breakout would only serve to cement the the Financials as a leadership group going forward.
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