Financial stocks get hit hard
Financial stocks are finding themselves back in the liability column in many investors' portfolios.
Shares of the nation's banks, brokerages and insurers were trashed Tuesday amid a vicious market sell-off, dashing hopes financials have seen the worst and raising doubts about last week's broad market rebound. The Financial Select Sector SPDR, which tracks a basket of financial stocks, tanked 4.1 percent - a notably poor performance even when the Standard & Poor's 500 declined 3.2 percent.
Pain in some financial-related stocks was even more severe. Goldman Sachs, which has been relatively immune to recent selling, fell 5.5 percent in the investment bank's worst fall since Dec. 11. Merrill Lynch dropped 5.6 percent, and banking giant Citigroup fell 7.4 percent.
"Things are looking bad again," says Eric Fitzwater, analyst at SNL Financial. Every time economic data are released that open discussion of a recession, "Financial stocks fall back into the hole," he says.
While financials are just one sector of the economy, investors are watching closely because they have been a:
- Leading indicator. Since much of the economy's trouble is centered around lending and credit markets, financial stocks have been early to react to news and have set the pace for the declines.
"Everyone is getting abused," says Jeff Tyler, portfolio manager at American Century. "But we continue to see more and more concern about financials."
- Recent glimmer of hope. Financial stocks hit bottom on Jan. 18 and staged a 16 percent rally through Feb. 1. Investors hoped interest rate cuts by the Federal Reserve would fix problems faced by banks, says Jeffrey Harte, analyst at Sandler O'Neill.
But economic data released Tuesday showing the service sector shrank for the first time in nearly five years tested faith in a recovery, Harte says. "The mentality went from: "The Washington cavalry has arrived' to "Maybe this is deeper than we thought,' " he says.
- Source of news that sways investor opinion. A pileup of downgrades of debt and stock ratings of financial companies are a big depressant for investors. Tuesday, Oppenheimer analyst Meredith Whitney cut her rating on Goldman Sachs from "outperform" to "perform," calling the investment bank's stock price unsustainable given the financial industry's challenges. Fitch Ratings may also downgrade about $220 billion in collateralized debt, bundles of loans that have been at the epicenter of the financial industry's woes, Bloomberg News reported. Fitch is also putting its AAA rating of bond insurer MBIA back under review.
The sell-off in financial stocks was needed given how much they ran up, says Jim Paulsen of Wells Capital Management. Still, he hopes this latest decline ends quickly. If financial stocks hold up, that may suggest "Maybe even if economic data worsens, it's already priced into the market," Paulsen says.
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