Financial stocks are the obvious trade for 2021 — but here’s why it’s not so simple

…Financials. Investment strategists at Morgan Stanley (via FT) are pushing banks stocks — seeing potential in 2022 from two potential catalysts:

• Rising interest rates.
• Increasing consumer lending.

The logic: As interest rates rise, banks — which rely on high interest rates to drive revenue — should perform better. And the more businesses/consumers borrow from banks, the more they earn.

Analysts expect 2-3 rate hikes in 2022 — with more following in 2023. Given how consumer lending remained stubbornly low during COVID, increased borrowing could be also important to their growth.

The chart above shows a clear correlation between bank stocks’ performance and interest rates — but investors should be asking a different question…

The better question: Do they perform better than the market average? According to Robert Armstrong of FT — while bank stocks do perform well when rates rise, whether they beat the market average is another issue.

Here’s how banks performed during past periods of rate increases, according to Armstrong:

• 2004-2006: Banks underperformed the market average.
• 2016-early 2018: Banks performed better during the first half of the period, but underperformed in the second half.

The ETF Way: The Financial Select Sector SPDR Fund (NYSE:XLF) — is up 33% this year, but nearly all of its gains came in the first half of 2021.

• Top 3 holdings: Berkshire Hathaway (NYSE:BRK), JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BACP)
• JPMorgan named Wells Fargo (NYSE:WFC) as one of its top picks — sees it being the most sensitive to rising interest rates.

Dive deeper into the financial sector.