In the past two days, US interest rates have jumped. The 10-year US Treasury yield (TNX) has risen from a low of 0.653% (10/2/20) to 0.762% (10/5/20), and the 30-year US Treasury yield (TYX) has appreciated from 1.427% (10/5/20) to 1.567% (10/5/20). Do US interest rates affect the stock market? Some sectors stand to benefit more from higher interest rates than others. The Financial sector is sensitive to changes in interest rates. Banks, insurance companies, brokerage firms, and mortgage-related securities generally benefit from higher interest rates. After all, many financial names can charge more for lending, which in turn can lead to more revenues and an increase in profitability.
The S&P Financial sector is the fifth-largest S&P sector, with a market-cap weighting of 9.80%. It has consistently underperformed this year, down 18.11% on a year-to-date basis. The sector is currently the second worst-performing major S&P sectors after the Energy Sector (XLE -47.08% YTD). After the 34.51% market correction from Feb-Mar 2020, the bench-mark S&P 500 Index (SPX) has made an impressive recovery. SPX has appreciated 5.50% so far this year. The bulk of the gains have come from three S&P sectors including the S&P Technology (XLK +29.44% YTD), the Consumer Discretionary (XLY +20.90%), and the Communication Services (XLC +12.71%).
We are encouraged by the Aug 2020 positive outside months that have developed in both the 10-year and 30-year US Treasury yields. There are technical signs to suggest the start of a bottom in US interest rates. As interest rates move higher (rising yields) Financial sector will likely improve. Based on the Relative Rotation Graph (RRG) study, the S&P Financial sector (XLF) has moved decisively into the Improving Quadrant which would suggest stabilization and the beginning of a sustainable turnaround situation. The RRG study of the S&P Financial sector also suggests that investors need to concentrate on the stocks currently residing within the Improving and the Leading Quadrants. Yet another technical study (SCTR) now shows 21 S&P 500 Financial names with technical scores above 60%. A stock with an SCTR score above 60% indicates improving technical credentials.
The S&P 500 Financial Sector (XLF) continues to underperform the SPX Index, at least from a relative perspective. It will need additional technical work before it can regain its leadership role. Nonetheless, it may be time to start looking for Financial stocks that may emerge as future leaders. Attached below are the RRG list as well as the SCTR rankings of the S&P 500 Financial sector (XLF). We recommend focusing on the Financial stocks that reside within the Improving and Leading Quadrants and have SCTR scores of 60% or higher as they are likely to be the relative strength leaders when the Financial sector moves into a leadership role.