Financial stocks are widely expected to be the big beneficiaries of a Fed rate hike. And with the Federal Reserve expected to announce the long-expected move on Wednesday, the financials sector appeared to celebrate early, with a more than 2 percent rise on Tuesday.
Indeed, within the sector, the clear leaders were the bank stocks, which made up Tuesday’s best performing industry group.
The expectation, roughly, is that an increase in interest rates will allow the banks to earn more on the liquid assets they are holding.
“If the Fed hikes — and it almost certainly will — we’re going to see an almost immediate move in the prime rate, and that’s going to flow directly into the interest income of all the lenders here in the United States,” commented Albert Brenner, director of asset allocation strategy at People’s United Bank, in a Tuesday “Power Lunch” segment.
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“If investors aren’t in the sector right now, it would be an appropriate time to buy into the SPDR, at least,” Brenner said, referring to the SPDR Financials ETF (XLF).
According to CME Group’s Fed Watch tool, traders are pricing in a roughly 80 percent chance that the Fed announces a 0.25 percent hike to the benchmark federal funds rate on Wednesday afternoon.
This has clearly filtered into market sentiment around the product that Brenner recommends.
“The options market in the XLF in particular is looking for a bullish sentiment to come out of the Fed meeting, and that would likely be a rate hike here,” commented Stacey Gilbert, head of derivatives strategy at Susquehanna.
“Just putting it in perspective, the implied move is around 2.5 percent, that’s basically twice of what we’ve seen around Fed meetings over the last five years,” she said, adding, “Albeit this is by far the biggest implied probability there is a rate hike.”