Financial stocks are back — here’s how the financial sector could perform going into 2021

The second worst performing sector of 2020 has become the second best performing sector in the past month — Financial. Stocks. Are. Back.

Top-performing sectors over the past month:

• Energy — The S&P 500 Energy index was up over 23%
• Financials — The S&P 500 Financial index was up over 9%
• Industrials — The S&P 500 Industrial index was up over 8%

All three of these sectors happened to be 3 of the worst-performing sectors of 2020.

In comparison — the tech sector, which has been the top-performing sector of 2020, is only up ~1% in the past month.

Downplay the losses

It’s an understatement to say that 2020 has been a bad year for banks — profits were down 70% and the banking industry feared a Biden administration could bring more regulations and taxes on banks.

But a country in a pandemic just might be enough to distract Biden away from bank regulations. Additionally, recovering economic conditions could set banks up for a big recovery. 

These factors have also helped banks outperform in recent weeks:

• Positive vaccine data has shifted momentum towards sectors that have fallen the most during the pandemic (e.g. travel, banking, oil & gas).
• The appointment of Janet Yellen as the US Treasury Secretary… Investors feared that Biden would have nominated Senator Elizabeth Warren, who is in favor of regulating banks.

According to a Bank of America survey, investors increased their stock allocation towards bank stocks more than any other sector in November.

For investors… Tread carefully

Investment Bank, Jefferies, raised its ratings on the financial sector to “Bullish” and famous investors like George Soros have increased their bank holdings by $88m in the second quarter.

Optimism in the banking sector is going up but don’t forget to pay attention to the negatives.

What could go wrong? If the pandemic were to set off a mass wave of bankruptcies, which would affect the loans that banks made to borrowers, bank profits would be affected.

(Learn more: These factors are holding bank stocks back)

Analyst take: According to Jonathan Golub, chief US equity strategist at Credit Suisse, financials are set to become one of the leading sectors in 2021 — from a valuation standpoint, financials and healthcare are the cheapest.