Certain exchange-traded funds, or ETFs, experienced a significant surge following Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium.
“The time has come for policy to adjust,” Powell said in a speech.
The reassuring statement regarding upcoming rate cuts sparked a strong rally in the most interest rate-sensitive corners of the stock market during Friday’s session. Here’s a look at three of the top-performing industry ETFs on Friday: regional banks, solar, and home builders.
See Also: Strong Economy Doesn’t ‘Justify’ 4 Rate Cuts This Year: How About 3? What Experts Are Saying
1) Regional Banks
The SPDR S&P Regional Banking ETF KRE surged 5% by 3:00 p.m. ET, setting up for its strongest session since December 2023.
Notably, all 141 of its constituents posted gains, underscoring a broad-based rally across the regional banking industry.
Eagle Bancorp, Inc. EGBN, United Community Banks Inc. UCB and Valley National Bancorp VLY were the strongest performers, up 10.6%, 9.6% and 8.7%, respectively.
Regional banks benefit from lower interest rates mainly because borrowing costs go down, resulting in higher loan demand among customers.
Additionally, U.S. regional banks can find a relief from decreased stress on their non-performing exposures, especially in commercial real estate, as reduced borrowing costs can encourage those firms to refinance their debt or invest in their businesses, thereby improving their ability to meet financial obligations.
2) Solar
The Invesco Solar ETF TAN soared 4.6% on Friday, marking its best session since late May 2024.
Top gainers were Sunnova Energy International Inc. NOVA and SolarEdge Technologies Inc. SEDG up 13.7% and 12.5%, respectively.
Solar companies often require substantial upfront capital to finance the development and installation of solar projects. Lower interest rates reduce the cost of borrowing, making it cheaper for these companies to fund their projects.
3) Home Builders
The iShares Home Construction ETF ITB gained 3.8%, on track to close Friday’s session at fresh record highs.
Top-performing names within this industry included Builders FirstSource, Inc. BLDR, Dream Finders Homes, Inc. DFH and Arhaus, Inc. ARHS, all screening gains above 7%.
Increased housing demand due to more affordable mortgage rates and lower financing costs represent tailwinds for the home construction business.
Chart: Regional Banks, Solar Energy, Home Builders Rally
The market interpreted Powell’s remarks as a green light for the first interest rate cut at the imminent September Open Market Committee meeting. However, Powell provided no indications regarding the size of the cut or the future trajectory of interest rates.
Powell paved the way for a turnaround in companies most negatively impacted by the recent surge in interest rates. Markets had already fully priced in a September rate cut and over 85 basis points of cuts by year-end.
“Fed Chair Jerome Powell was dovish in his Jackson Hole speech today. He didn’t hedge. He didn’t push back against market expectations of several rate cuts ahead as we anticipated he might,” Ed Yardeni, president at Yardeni Research, commented.
“Fed Chair Powell took a dovish tone at Jackson Hole, sounding more preemptive on the labor market and locking in a September cut,” Bank of America economist Aditya Bhave stated.
Powell “struck a dovish tone on the labor market and more firmly emphasized that the Fed’s tolerance for labor market cooling had reached its limits and any further weakening would be unwelcome,” Goldman Sachs economist Jan Hatzius stated.
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