Financials have been on a tear since the beginning of this year, gaining significantly on optimism surrounding a higher rate environment and strong economic expansion and steady job growth. At the end of its policy meeting held on Dec 12-13, the Fed decided to increase its key rate for the third time this year and signaled three more hikes in 2018.

With the fifth rise in Fed interest rate since the 2008 financial crisis, prospects for the financial sector have improved. Given this backdrop, mutual funds with significant exposure to the financial sector are expected to be strong investments as key interest rate is likely to march higher in the near future.

Unemployment Still At 17-Year Low, Q3 GDP Advances

In its second estimate, GDP increased from the previous estimate of 3% to 3.3%, the best since the third quarter of 2014. It also improved from the second quarter’s pace of 3.1%. Moreover, corporate profits after tax increased 5.8% year over year, after a 0.1% uptick in the second quarter of this year. Additionally, both consumer spending and business investment gained traction in the third quarter. 

More significantly, domestic non-farm payrolls advanced by 228,000 in November, significantly higher than the consensus estimate of 199,000, per the U.S. Bureau of Labor Statistics. Additionally, the unemployment rate remained unchanged at 4.1% in November, its lowest in 17 years.

Fed Hikes Rate For 3rd Time in 2017

Following its two-day Federal Open Market Committee (FOMC) policy meeting held on Dec 13-14, the Federal Reserve decided to raise its key interest rate by 25 basis points. The central bank raised its key rate for the third time this year and for the fifth time in almost a decade. Moreover, the Fed also expects three additional rate hikes next year and two more in 2019.

The central bank projects economic growth at the rate of 2.5% in 2018, up from the previous expectation of 2.1%. Further, the growth rate is anticipated to be 2.1% in 2019 — moderately higher than the previous forecast of 2%.