Confidence in financials is a good thing for the market, says Jack Ablin, CIO of BMO Private Bank.
Financials have been outpacing the S&P 500 this month, returning 2%, Ablin writes in his market update. And they have higher rates to thank, as the yield on the 10-year Treasury has grown from 2.12% at the end of May to 2.44% this week. Higher interest rates generally mean more profits for the industry as the spread between borrowing and lending costs widen, Ablin writes. Stock market investors in turn can be happy that financial companies are doing well, because that means “the system is intact,” he says.
“Comparing the S&P’s 6-month return against the financial sector’s 6-month return relative to the broad market, we found the correlation to be 73 percent, suggesting the market thrives when financials outperform,” writes Ablin.
The S&P should have more room to run if this trend continues, says Ablin. Bond investors will see economic growth and higher inflation, and demand higher rates- a positive sign for the S&P 500.