The rally in banks has only just begun.
So say technical analysts at Strategas Research Partners, who cite 75 years of history in arguing it’s way too early to abandon the group that only started outpacing the S&P 500 Index about 18 months ago. Banks stocks could beat the benchmark for another three to five years regardless of where rates go or the shape of the yield curve, they wrote in a note Tuesday.
Strategas counts five distinct periods of leadership for financial shares lasting an average of six years each. The most recent began in 2016, so if past is prologue, financials have a ways to go.
“This has been a good move thus far, but there’s still plenty of fuel in the tank based on what history has shown,” Todd Sohn, Strategas Research Partners technical analyst, said by phone.
Bank bulls have come to regard as gospel the theory that rising interest rates are needed to sustain the move. But according to Sohn, prior periods of bank outperformance don’t have much correlation with that or the shape of the yield curve. In two of the five stretches, rates were rising, while in the other three they fell. In some historical instances the yield curve was volatile, whereas in others it was either steepening or flattening.
“The way it is right now it looks like rates want to go higher,” Sohn said. “But the good news is that the banks can still work regardless of the direction of interest rates.”
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