By Tomi Kilgore, MarketWatch
Everett Collection Inc.
Stock market investors should stop blaming falling crude oil prices and energy stocks for their suffering this year, and start blaming financial stocks.
Of the S&P 500’s 10 key sectors, financials have performed the worst so far this year by a wide margin, as fears that a recession is looming continue to grow. The SPDR Financial Select Sector exchange-traded fund /quotes/zigman/246222/composite XLF -0.63% has tumbled 13% year to date, and is on track to close Wednesday at a two-year low.
In comparison, the SPDR Energy ETF /quotes/zigman/246199/composite XLE +1.37% has lost just 7.4% and the S&P 500 /quotes/zigman/3870025/realtime SPX +0.11% has declined 7.7%. Read more about how liquidity concerns are spreading beyond the energy sector.
Among the financial ETF’s (XLF) top holdings, the biggest losers this year have been the shares of Bank of America Corp. /quotes/zigman/190927/composite BAC -0.55% , down 25%; Citigroup Inc. /quotes/zigman/5065548/composite C -0.05% , down 24%; Goldman Sachs Group Inc. /quotes/zigman/188479/composite GS -0.38% , down 17%; and J.P. Morgan Chase & Co. /quotes/zigman/272085/composite JPM -0.37% , down 15%. Goldman and J.P. Morgan Chase are also components of the Dow Jones Industrial Average /quotes/zigman/627449/realtime DJIA -0.20% .
Also in the XLF, American Express Co.’s stock /quotes/zigman/217470/composite AXP -0.50% is the worst performing Dow component this year, plunging 23%.
Analyst Vivek Juneja at J.P. Morgan wrote in a note to clients that the bank stocks he covers are now trading at valuation levels seen “during periods when there were fears of a recession,” as well as concerns about capital dilution.
“This sharp sell off is due to concerns about no more rate hikes and higher credit losses--both due to weakness in oil markets and global economic outlook--plus some concerns about weaker capital markets,” and how the slowdown will hurt spending and payment processing revenues, Juneja wrote in a note to clients.
Juneja said another “key area of concern” are sharply higher provisions at most banks for loans made to troubled energy companies, which have been battered by the recent sharp weakness in crude oil prices.
Fears of an economic slowdown, which have been fueled by dovish comments by the Federal Reserve, tepid economic data, a slumping stock market and another quarterly-decline in corporate earnings, knocked 10-year Treasury yields down to a one-year low on Wednesday.
Falling Treasury yields tend to hurt bank earnings, by narrowing the spread banks earn from funding longer-term assets, such as loans, with shorter-term borrowings.
If recession fears continue to grow, investors can expect the selloff in financial stocks to accelerate.
The Bank for International Settlements--known as the central bank of central banks-- concluded in a 2012 study that, because bank balance sheets are highly leveraged, there is more risk and volatility in bank stocks than shares of nonfinancial companies. The study indicated that recessions tend to hurt bank stocks more than expansions help.
“Intuitively, the state of the business cycle can influence bank equity prices through its impact on bank assets,” the BIS study said. “The negative influence near the bottom of the cycle is stronger than the positive influence near the top of the cycle, given that credit losses that materialize in a recession were typically underpriced during the preceding boom.”