Like the rest of the market sectors, the Omicron variant sent bank stocks in a daze of volatility, but bullish optimism remains heading into 2022.
The prospect of rising interest rates amid rising inflation means that banks that utilize lending products for revenue can expect higher profit margins. A hawkish Federal Reserve is looking to wind down its stimulus measures and start tapering off its bond purchases with the prospect of raising rates in 2022.
As far as headwinds like COVID-19 go, they haven’t stopped bank stocks from outperforming in 2021. The MSCI ACWI Banks Industry index, for example, is up 23% for the year.
“Fears about the economic impact of the new Covid-19 variant have sent bank stocks on a roller-coaster ride, but they are still on track for their best year in more than two decades,” a Wall Street Journal article explains. “The KBW Nasdaq Bank Index, which measures the performance of big lenders including JPMorgan Chase & Co. and Bank of America Corp., was up nearly 44% in 2021 before Thanksgiving. At that rate, the KBW far outpaced the gains in the broader S&P 500 index, which was up about 25%.”
Levering Up on Financials
One way to play strength in banks and the overall financial sector with leverage for amplified gains is the Direxion Daily Financial Bull 3X ETF (FAS ). FAS seeks daily investment results equal to 300% of the daily performance of the Russell 1000® Financial Services Index, which is a subset of the Russell 1000® Index, which measures the performance of the securities classified in the financial services sector of the large-capitalization U.S. equity market.
“Banks play a central role in the American economy, so the outlook for U.S. growth causes their stock prices to swing more than broader stock-market indexes,” the Wall Street Journal article adds further, noting that recent volatility hasn’t changed investors’ minds when it comes to optimism in the banking sector.
Banks were one of the hardest-hit sectors when the pandemic reached fever pitch in 2020, but have since rebounded amid an improving economy and vaccine roll-outs. Investors are expecting that banks will continue to head towards the upside as the new year rolls around.
“It didn’t take much ingenuity to figure out that when the economy recovered, people would be interested in banks,” said Fredric E. Russell, founder of Fredric E. Russell Investment Management Co. in Tulsa, Oklahoma.
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