By Alison Griswold
NEW YORK, Aug 11 (Reuters) – It’s hard to overstate the
damage that the banking crisis caused financial stocks.
At their peak on June 1, 2007, the stocks in the Standard &
Poor’s 500 financial sector index had a collective net
worth of more than $2.9 trillion, roughly 30 percent greater
than that of the next largest group, tech stocks.
Then the housing bubble burst, and their market value
plummeted by $2.4 trillion, a drop of 83 percent, compared with
the broader S&P; 500’s 58 percent swoon. When financial stocks
hit bottom in March 2009, the whole group was worth just $510
billion, roughly the equivalent of the combined pre-crisis
market value of JPMorgan Chase & Co. and Citigroup
.
Such a fall makes their comeback all the more remarkable:
The financial sector stands within a whisker of recapturing the
mantle as the $17 trillion U.S. stock market’s heaviest hitter.
At present, the financial index accounts for 16.6 percent of
the entire S&P; 500 – about 1 percentage point less than the
technology sector, data from S&P; Dow Jones Indices
showed. At the start of the year, the gap between the two stood
at about 3.5 points.
“The psychology toward banking has been so incredibly
negative, and the big financial gurus were so negative, that
they completely missed the fact that the banking industry was
showing this gradual steady improvement,” said Dick Bove, bank
analyst at Rafferty Capital Markets in Tampa, Florida. “In the
past couple weeks, they’re all saying, ‘Banking is back.'”
Financials have added nearly 25 percent this year, lagging
only healthcare and consumer discretionary shares. Should they
surpass tech, they would top the S&P;’s 10 industry sectors for
the first time since May 2008. At the market low on March 9,
2009, they had a market weight of just 8.9 percent, the smallest
since 1991, when the S&L; crisis was in full rage.
For the most part, big banks are driving the growth.
JPMorgan Chase, Wells Fargo, Citigroup and Bank of
America have provided the sector’s biggest boost. Each
has gained at least 24 percent so far this year.
Wells Fargo, the nation’s largest bank by market value, hit
an all-time high in late July. This year, the stock has risen
nearly 27 percent, on track for its best year since 2000.
MORE UPSIDE?
Banking stocks may have even more room to run, according to
an analysis by StarMine, a Thomson Reuters company.
On balance, stocks in the group trade at about 76 percent of
their StarMine intrinsic value, which evaluates a stock based on
projected growth over the next decade, using a combination of
analysts’ forecasts and industry growth expectations. By that
measure, tech shares are 8 percent overvalued.
Sector heavyweights Citigroup, Bank of America and AIG
are considered cheaper than more than 90 percent of the
market. Citigroup’s intrinsic value is $88.57, better than 70
percent above its current $51.32. StarMine sees comparable
upside for Bank of America, pegging its intrinsic value at
$25.62 versus Friday’s closing price of $14.45.
“The problem with the refinancialization of the U.S. economy
is it puts us at greater risk for another financial collapse,”
said Barry Ritholtz, chief executive and director of equity
research at Fusion IQ in New York.
“The collapse started the process of definancializing, and
now we’re back to refinancializing.”
Meanwhile, several of the largest banks remain in the
crosshairs of authorities. This week, the U.S. government
accused Bank of America of fraud in its sale of mortgage-backed
securities.
JPMorgan, struggling to repair its reputation since losing
more than $6 billion in 2012 on its so-called “London Whale”
derivatives trades, is under both criminal and civil
investigation for its own MBS sales.
For the week, financial shares slipped 1.9 percent,
exceeding the S&P; 500’s pullback of 1.1 percent. Still, the
stocks have posted double-digit gains for four of the past five
years, and are on pace for a fifth straight quarterly rise.
Traditionally, steady performance by financial stocks was
seen as a promising sign for the economy, as increased borrowing
and lending helps businesses and individuals by encouraging
consumption and job creation.
Through 2007, bank stock prices far outpaced the broader
market. After the recession, though, they languished while
others, such as consumer and energy shares, did well. Their
sluggish performance in the early years of the recovery
reflected not only the headwinds of a stiffer regulatory
environment, but the slow rebound in demand for credit.
TECH HAS ITS DEFENDERS
Some in the financial industry say tech should remain in the
top spot, a perch it has held for more than five years now.
“Tech, in my opinion, has more redeeming underlying value
than finance,” said Ralph Shive, portfolio manager of Wasatch
Large Cap Value Fund in South Bend, Indiana. “Technology usually
adds value, adds productivity, creates value out of thin air.”
Goldman Sachs, in a research report earlier this month,
ranked financials among the weakest S&P; 500 industry sectors in
terms of value and growth. The tech sector earned the highest
marks.
Others contend that the financial sector’s advance over tech
can be healthy for the economy, so long as the market cap of the
financial index does not swell to levels that historically have
proved unsustainable.
Right before the tech bubble burst in 2000, for example, the
S&P; 500 tech sector amounted to 34.5 percent of the index – the
highest percentage of the S&P; that any sector has ever reached,
S&P; Dow Jones data shows.
“Now that financials and tech are relatively equal, that is
an indicator that the market is very balanced at this point in
time,” said Doug Cote, chief market strategist at ING U.S.
Investment Management in New York. “Those have traditionally
been the biggest two sectors.”
(Reporting by Alison Griswold; Editing by Dan Burns, Steve
Orlofsky and Jan Paschal)
