After a disappointing start to the year, financials were the top performing sector in the second quarter.
And technical analysis suggests they may have more room to run.
As shown in the LPL Chart of the Day, Financials Outperformance May Mark a Change in Trend, the relative performance of financials versus the S&P 500 Index has broken a downtrend, which we see as a bullish technical signal. This tells us the technicals may now be aligning with our optimistic fundamental outlook for financials, which we highlighted in our Midyear Outlook 2019.
Financials’ strong performance has continued a few weeks into July, with the S&P 500 Financials Index and KBW Bank Index both outpacing the market thus far. Defensive areas of the market, including the utilities, real estate, and healthcare sectors, have all lagged the S&P 500 since the end of the first quarter. We think cyclicals’ outperformance could continue if economic fundamentals improve.
“The rotation from defensive stocks, which have led for much of the past year, to more cyclical areas of the market, is not only healthy for the bull market, but should favor active managers who can overweight these sectors,” according to LPL Chief Investment Strategist John Lynch.
While we don’t anticipate broad market performance to be as strong in the second half of 2019, we believe that an overweight to financial stocks may offer an opportunity for suitable investors based on attractive valuations, a potentially steeper yield curve, and an improving technical picture.
IMPORTANT DISCLOSURES
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Active management involves risk as it attempts to outperform a benchmark index by predicting market activity, and assumes considerable risk should managers incorrectly anticipate changing conditions.
This Research material was prepared by LPL Financial, LLC.
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