Think It's A Level Playing Field In The Financial Sector? Think Again

Includes: MDY, SLY, SPY, XLF
by: Bespoke Investment Group

The chart below highlights the relative strength of the Financial sector compared to each corresponding index across all three market cap levels (S&P 500 large cap, S&P 400 mid-cap, and S&P 600 small cap). Rising lines indicate that the sector is outperforming its index, while falling lines indicate that the sector is underperforming. Most of the time the sector's relative strength moves in the same direction across all three market cap levels, but there are times when they diverge, and these divergences are noteworthy.

Ever since Dodd-Frank was signed into law, many smaller banks and financial institutions have complained that the law creates a perception in the market that systemically important financial institutions will be propped up by the Federal government should problems arise. With this perception in the market, these firms face lower borrowing costs, putting them at a competitive advantage to their smaller peers.

Whether or not you agree with this argument is up to you, but looking at the relative strength of the Financial sector based on market cap shows that the market believes this. In the chart, the S&P 500 large-cap Financials sector is near its highest levels in the last year relative to the S&P 500. Meanwhile, both the mid- and small-cap Financial sectors are underperforming their respective indices.