In both 1994 and 1999, when interest rates rose, financial funds lost 2 percent-3 percent. Ever since interest rates reached historic lows in 2002, forecasters have expected rates to move up, which has hurt financial stocks.
Although the Federal Reserve has tightened, driving up short-term rates, long-term rates have remained low. The result has been a flat yield curve. Investors fear that banks – the main holdings in financial funds — won’t be able to make much money if there is little difference between their payments to depositors and their collections from loans.
In truth, a flat yield curve should not necessarily discourage investors. Usually, when the Fed stops raising interest rates, financial stocks start to outperform. We may be in the “late innings” for Fed tightening, so the time for a turnaround might not be far away.
Moreover, the fundamentals are encouraging for banks. Asset quality is good, without many losses from bad loans, and credit card losses are under control.
