GOLDMAN SACHS: Investors aren't positioned properly for the Fed's rate decision - here's a trade to take advantage of their negligence
- The Federal Reserve is widely expected to hike interest rates by another 25 basis points Wednesday, to a range between 1.75% and 2%.
- Goldman Sachs has crunched the numbers and found that investors are underpositioned for possible price moves in bank stocks.
The Federal Reserve is widely expected to raise interest rates by another 25 basis points Wednesday, and naturally the entire investment community will be watching with great interest.
The sheer fact that the hike has been so well-telegraphed by the Fed suggests that market moves will be minimal. But that won't necessarily apply to bank stocks, which have historically moved 1.3% on Federal Open Market Committee (FOMC) meetings, according to Goldman Sachs data.
In fact, Goldman has studied price fluctuations around FOMC meetings over the past seven years and found that traders of bank stocks are woefully unprepared for the volatility that might ensue.
The chart below shows this dynamic in play. It compares the total return for exchange-traded funds tracking financial firms in the S&P 500 and the KBW Bank indexes and finds that both have underperformed over the past two months, controlling for moves in macro assets.
Coupled with their findings around FOMC-driven volatility, Goldman concludes that investors are underestimating the possibility of a relief rally in financial stocks - particularly banks. It makes sense when you consider that higher interest rates are widely expected to boost interest income for banks, which then filters down to their respective bottom lines.
So what's a trader to do? Take long positions on large-cap US banks, recommends Goldman.
"Based on the significant underperformance over the past month in the XLF and BKX, it appears investors have broadly exited positions in large-cap financials," a group of Goldman strategists wrote in a client note on Tuesday, before the start of the two-day meeting. "Bank investors are underpositioned ahead of FOMC."