The financial sector is attracting a lot of investor attention lately. After President Donald Trump passed the tax reform last year, analysts are highly optimistic about the financial sector’s performance owing to recent trends in the sector.
The Fed hiked interest rates by 25 basis points for the sixth time since it started going on an upward trajectory in December 2015. Higher interest rates are known to be a positive for the financial sector and strong job growth may drive consumer spending higher. Moreover, the tech sector is another sector every investor flocks to during periods of rising rates, owing to their low debt commitments.Â
Cause for Appeal
Per data released by the Labor Department, the U.S. economy added 313,000 jobs in February, the most since July 2016. Moreover, the jobless rate remained at 4.1%, a 17-year low. In the most recent FOMC meet, the committee of central bankers led by Jerome Powell increased the 2018 GDP forecast for the U.S. economy to 2.7% from 2.5% in December.
Moving on to interest rates, The Federal Reserve hiked interest rates by 25 basis points in Powell’s first meeting as chairman. The new benchmark funds rate was increased to a target of 1.5% to 1.75%. “The economic outlook has strengthened in recent months,” the committee said in its post-meeting statement, inviting speculation of a steeper path in rate hikes going forward in 2019 and 2020.Â
Rate hikes are particularly positive for financial stocks, as it leads to an increase in the prime rates, at which banks lend to customers.
Moving on to discretionary stocks, these are cyclical and an improving employment scenario makes consumers more likely to spend beyond the necessities. As a result, consumer-discretionary stocks might see a rise, as strong job growth drives consumer confidence higher. Conference Board’s measure of consumer confidence increased to 130.8 in February compared with downwardly revised 124.3 in the prior month, the highest since November 2000.
