Sector Breakdown: Financials

Chartz with Jartz – Over the last two fiscal quarters, the economy has seen interest rates begin to rise. In the aftermath of the coronavirus pandemic, the Federal Reserve focused on a hands-on monetary policy that included substantial stimulus handouts and low interest rates in hopes of bolstering the domestic economy. Recently, the Fed has begun tapering, in other words decreasing the pace in which they are buying back assets such as treasury securities. The goal of tapering is to decrease the money supply of the consumers. With conflicting reports of inflation being transitory and then more longer-term, investors are left scratching their heads wondering ‘What is next for our economy?’. With multiple macro-economic indicators such as inflation, interest rates and the job market all receiving inconsistent reports, it is difficult to get pulse on where the economy is headed. One sector is that stands to gain/loss based on the rising interest rates in the Financial Sector. In a previous blog posts we discussed the most recent drop in the Dow Jones Average of over 900 points intraday. During this time, the Investment Management Team (IMT) purchased multiple positions in banks for certain portfolios. The reasoning behind the purchases lies within interest rate movements. The increasing of interest rates allows financial institutions to earn more on the spreads between what they can pay to customers and earn from debt securities. There is also a historically positive correlation in rising interest rates and performance of the economy. As the economy improves, investors are more likely to borrow from banks to expand businesses or upgrade housing. In the chart below, you can see the Financial Sector ETF (XLF) moving sideways within a 10% rectangle over the last four months. One could speculate that investors are waiting to see how interest rates and inflation play out of the coming months as the Fed decides on future monetary policy. For more analysis on holdings and ideas please tune into the blog every Wednesday.

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