Is the bear market for financials over?
Some market watchers think that the unprecedented rout of financial stocks may have ended in July.
Some market watchers think that the unprecedented rout of financial stocks may have ended in July.
The finance sector rebounded sharply July 15, the day after regulators announced a plan to shore up Fannie Mae of Washington and Freddie Mac of McLean, Va., and just days after the federal government’s seizure of Pasadena, Calif.-based IndyMac Bank FSB.
Since then, the sector has held above those lows.
“Arguably, July 15 was the watershed date [for a] capitulation, or bottom,” in bank stocks, said Jon Bruss, chief executive at Fortress Partners Capital Management Ltd. in Hartland, Wis., who runs about $50 million in private funds that invest in small banks.
“The recovery has been fairly consequential since July 15 in just about all the bank stock indexes,” he said.
Rob Arnott, chairman of Re-search Affiliates LLC of Pasadena, which develops fundamentally weighted indexes, called the bounce in financials a bursting of the “anti-bubble.”
An anti-bubble is the opposite of a bubble, he said, where valuations have fallen below levels that any reasonable scenario would justify.
The swoon in financial stocks is one of the worst in recent history.
In the trailing four-quarter period ended June 30, the financial sector shed 42% of its market value, the worst such period of absolute performance of financials since Standard & Poor’s of New York began publishing sector returns in 1989, according to Research Affiliates.
The last time financials led the way down was in 1990, said Ken Safian, president of Safian Investment Research Inc. in White Plains, N.Y., which manages $1.3 billion.
His own bank stock average went down about 50% in 1990. “Today, we’re also down 50%,” Mr. Safian said.
But this time, the stresses to the financial system seem worse than in 1990, he said. Nevertheless, “we probably are close to a bottom” on the bank and brokerage stocks, Mr. Safian said.
Mr. Arnott said that had it not been for the horrendous loss in financials, the overall market would be down only 12% to 13% from its peak instead of the current 21% drop on the S&P 500, which qualifies as an official bear market.
“The market outside the financial services sector is nowhere near a bear market,” he said.
An index of traditional growth stocks Mr. Safian uses, which in-cludes food, drug and technology stocks, was off 1.4% year-to-date as of last Wednesday. The S&P 500, meanwhile, was off 12.7% due to its heavier weighting of financials. Mr. Safian said his bank average was down 23.2% year-to-date, and over the 12-month period, it was off 39.6%.
“The disparity of performance within the market is the greatest I have seen on Wall Street, and I’ve been in business since 1958,” he said.
Mr. Arnott called it “astonishing” that the market has held up as well as it has, given the likelihood of a recession and his belief that stocks are still going through a shorter-term cyclical bear market within a secular bear market.
LOUSY TWO YEARS
Over the past two years, the financial sector has suffered an ignominious fall from its perch atop in the U.S. stock market.
As of Sept. 30, 2006, the combined market capitalization of financial stocks made up 24% of the S&P 500, according to Research Affiliates. But by July 2008, the financial sector had dipped to slightly more than 14% of the S&P 500, placing it third, behind energy and information technology.
That’s despite the fact that financials are by far the largest sector in the publicly traded U.S. economy, according to Research Affiliates.
Furthermore, the big names in financial services are no longer so big.
Going back to Sept. 30, 2006, four of the top 10 stocks in the U.S. stock market, as measured by total market capitalization, were financial services companies: Citigroup Inc., American International Group Inc. and JPMorgan Chase & Co., all of New York; and Bank of America Corp. of Charlotte, N.C., according to Research Affiliates.
“That’s pretty heavy loading” toward the financials, Mr. Arnott said.
But as of last month, none of those companies made even the top 15. Only JPMorgan makes the top 20 now, Mr. Arnott said, and even then, “just barely.”
E-mail Dan Jamieson at [email protected].
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