Everyone Loves U.S. Banks as Group Sets Sights on 2007 Records

(Bloomberg) -- It might be time to start worrying about the bank rally.

Signs of investor euphoria are mounting in a group that’s surged 17 percent since the Nov. 8 election to the highest level in almost nine years. More global money managers are overweight lenders than at any time since at least 2002, according to a Bank of America Corp. report. And retail investors poured more than $5 billion into financial exchange traded funds in the past month, more than any other industry.

There’s certainly been reason for optimism, as Trump looks set to roll back regulations that have crimped earnings power at the same time that the Federal Reserve is all but certain to raise interest rates. But the impact from those changes may already have been priced in. The industry’s relative strength indicator climbed on Nov. 9 above 70 -- and it’s stayed at least that high every day since, for the longest foray on record into territory that normally signals a rally has gone too far too fast.

That isn’t to say the good times have to end. Morgan Stanley says the bank rally can push deep into 2017, driven by loan growth and higher rates. And the S&P 500 Financials Index still sits about 30 percent below its peak in 2007, the only group in the benchmark index that hasn’t recouped its high set before the financial crisis.

--With assistance from Joseph Ciolli To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net. To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Jeremy Herron