Price Action & Performance
XLF has slowly been building back value after the disastrous bank runs of early 2023. In April, XLF printed a new all-time for the SPDR while also registering a new 52-wk relative-high vs. the S&P 500 Index. This unremarkable but steady outperformance from a sector that is out of the limelight is usually a sign of sustained improvement. With each of the 5 industries comprising the Financial Sector making new relative-highs vs. the S&P 500 in April and a long-term basing pattern on the chart challenging resistance, the XLF is worth owning.
Economic and Policy Drivers
Fed policy is directed at inflation targeting, but it could have a large effect on the Financial Sector depending on how investors position for any potential change in interest rate policy. If CPI is very hot and the Fed is forced to announce multiple hikes, this could tank the economy and the Sector. In this scenario the same dynamics that imperiled the balance sheets of SVB, SBNY etc. would be on the table putting pressure on Bank balance sheets. However, if guidance is more restrained and inflation is merely sticky rather than structural, this would create a potentially ideal scenario for the XLF as it has a high concentration of Value stocks (Banks, Insurance, Asset Managers, I-Banks and Brokerage, Custody Banks).
How Can XLC Help?
XLF offers market weight exposure to several industries that are often hard to differentiate at the stock level including Banks, Insurance stocks. It has a large Value component which typically does well when inflation is on the rise, and it has been out of favor for most of the past two years which sets the table for upside surprise as expectations and sentiment have been tepid for some time. Further inflation pressures would likely force more capitulation away from big Growth Sectors and would likely benefit a wide swath of Value stocks including the many within XLF. If the economy shows resiliency, we could see continued strength in asset managers (BX,BLK), brokerage (SCHW), Consumer Finance (COF, AXP) and others. XLF offers exposure across these areas.
In Conclusion
The XLF has improved steadily over the past 9 months. Deep discounting from the 2023 bank crisis has depressed sentiment, but slow, steady, sustained technical improvement at the sector level and some stand out areas. At this point, the outlook is for continued improvement. I would recommend an overweight position in XLF for May of 2024.
Chart | XLF Technicals
- XLF has demonstrated sustained overbought momentum from December ’23 through March. This is usually a good long-term setup for the sector
- Not seen on the 1yr chart, but price has taken out a multi-year high from 2022. These are positive technical developments for XLF.
