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March 27, 2017, 11:40 a.m. EDT

Financials extend recent weakness, but remain biggest postelection winners

Sector is down 8% from a high hit earlier this month

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By Ryan Vlastelica

Getty Images
Lloyd Blankfein, chief executive of Goldman Sachs

The financial sector tumbled on Monday, as concerns grew over President Donald Trump’s ability to pass his ambitious economic agenda after a Republican plan to repeal and replace Obamacare was scrapped last week.

The industry—banks in particular—have been pressured of late, with the main exchange-traded fund tied to the group down more than 5.6% in March alone. Despite that, they remain the market’s biggest postelection gainers, although this means they could also be the most vulnerable to any sign that the rest of Trump’s agenda will have difficulty passing.

The Financial Select Sector SPDR ETF /zigman2/quotes/209660484/composite XLF +1.10%  fell 1.3% on Monday, the largest decliner among the major S&P 500 sectors. The fund is on track for its eighth decline of the past 10 sessions, and it has seen outflows of more than $550 million over the past week, according to FactSet data. It has dropped about 8% from a high reached earlier this month.

Among other ETFs, the iShares U.S. Financials ETF /zigman2/quotes/207031846/composite IYF +1.05%  fell 1%, while the SPDR S&P Bank ETF /zigman2/quotes/201006419/composite KBE +1.12%  sank 1.8% and the regional bank equivalent /zigman2/quotes/200108291/composite KRE +0.99%  dropped 1.9%.

The failure of the health-care bill, Trump’s first major legislative test as president, raised questions about the president’s ability to push bills through Congress, as well as the unity of the Republican coalition. Markets have rallied since the election on the hope that Trump’s economic proposals—including on taxes and regulation—would accelerate economic growth, and those gains could be at risk if no legislation materializes, especially with stock valuations at lofty levels.

Financials may be the clearest test case for this issue. The sector has soared since the election, up more than 15%, by far the biggest gain of any S&P 500 sector. (In second place is technology /zigman2/quotes/207444675/composite XLK +1.43% , up about 10.5%.) It has been lifted by the twin tailwinds of Trump’s expected policies and the Federal Reserve, which is expected to accelerate its pace of interest rate hikes. Higher rates are generally seen as good for the financial sector by lifting net interest margins, which in turn boost bank profits.

See also: Investors are scaling back corporate tax-cut hopes, in one chart

While the Fed is still expected to raise rates throughout the year, and the U.S. central bank announced a hike at its March meeting, it is only expected to institute two additional raises in 2017. Previously, investors had speculated that 2017 could see a total of four increases, a bet that contributed to the financial sector’s advance.

With a more tepid rate outlook, and with new political uncertainty, there are concerns the sector’s rally may have been overdone. While the group is up more than 15%, earnings expectations for the sector have risen a mere 1.8% over the same period.

The yield on the 10-year Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00%  was down 3.7 basis points to 2.38% on Monday. Yields have also risen sharply since the election, but they have dropped of late amid the slower rate expectations and the policy outlook in Washington.

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Ryan Vlastelica is a markets reporter for MarketWatch and is based in New York. Follow him on Twitter @RyanVlastelica.

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