Financial sector stocks take lead in markets' run to recovery
— -- Here's some good news you can take to the bank: Financial stocks are on a tear, lending the market critical leadership as it attempts to maintain its summer recovery.
Since the March 9 low, the Standard & Poor's 500 financial sector is dominating, up 137% vs. the S&P 500's 52% gain. The consumer discretionary sector is No. 2, up 67%.
Investors are torn on how long financials' run can last, but many concur the sector's outperformance is a vote of confidence in the strength of the banking system and economic recovery.
"Everyone was convinced of the insolvency of the financial system," says Jim Paulsen of Wells Capital Management. "Every day financial stocks go up, that flies in the face of fears."
Shares of banks, insurers and other financial institutions continue to rise in the face of bad news. The Federal Deposit Insurance Corp. warned last week that the number of banks and thrifts on the watch list soared to 416 in the second quarter, up from 305 in the previous quarter.
Still, analysts say financials have positives behind them, including:
•Bounce back from being priced for calamity. The stocks are enjoying the biggest rise because they were hit hardest on fears about the health of the banking system, says Bill Stone of PNC Wealth Management. "Stocks closest to the abyss are leading us up now," he says. Despite its recent rally, the financial sector is still down roughly 60% from the 2007 high, making it the market's worst performer.
•Improved ability to withstand shocks. Following the government's stress tests, banks got themselves in better shape with capital-raising binges, says Derek Ferber of SNL Financial. This year, banks and thrifts have raised $78.4 billion in stock and $25.25 billion in senior debt after raising very little in 2008, he says.
That capital will help banks withstand the stress as more loans go bad, he says.
•Attractive operating environment. Banks have access to low-cost money from the government, while there's plenty of room to make money on mortgages and other loans, says Rod Smyth of Riverfront Investment. "Banks have a license to print money," he says.
Related Stories
ABC News Live