How Do Financials Typically Trade Ahead Of Fed Rate Hikes?

The S&P 500 is down again on Thursday following the release of an unexpectedly hawkish Fed minutes on Wednesday. One sector, however, understandably demonstrated a strong initial surge following the news: big banks.
 

But with the next potential rate hike still about a month away, what can shareholders of Bank of America Corp BAC, Citigroup Inc C, JPMorgan Chase & Co JPM, Wells Fargo & Co WFC and other financials expect in the weeks ahead?
 

For starters, bank investors have likely been extremely disappointed by the performance of their stocks following the highly-anticipated first rate hike of the new cycle back in December. Since the official December rate hike announcement, all of the banks mentioned above, as well as the Financial Select Sector SPDR Fund XLF, have significantly lagged the market, falling between 6.0 and 19.0 percent.

Surprisingly, this type of behavior is typical. Banks have a history of mixed results during rate tightening cycles. The Federal Reserve may sometimes be mysterious when it comes to short-term timing, but it tends to be pretty predictable in the long run, allowing most of its decisions to be baked into bank share prices well in advance of the actual news.

Related Link: How Have Bank Stocks Traded During The Last Three Fed Tightening Cycles?

As for the next month of trading, the bank investors should keep expectations low. In the one month leading up to the last five rate hikes dating back to December 2005, the XLF has averaged a 1.2 percent gain compared to a 1.4 percent gain by the SPDR S&P 500 ETF Trust SPY.

Disclosure: the author is long BAC.