Amid sinking energy prices and stagnant interest rates (even after a Fed hike), financial stocks have been taking it on the chin.
As of Tuesday (Feb. 2) afternoon, energy companies were markedly lower, but financial names, as proxied by the XLF, were off 2.4 percent, far more than the broader markets. The 10-year Treasury has much to do with the plummet, as rates here are lower by several basis points and the yield at this Tuesday afternoon writing stands at 1.88 percent. That comes despite the aforementioned rate hike. One projection of note, Seeking Alpha reported, is that short-term rate markets seem to be “pricing in less than one 25 basis point rate hike for the remainder of the year.”
That would imply that the rates banks and other financial companies can charge on loans may be stuck in neutral. Should that be the case, net interest margins may not get much traction through 2016’s remainder – and it’s only February, which in turn means that earnings, and possibly even dividend hikes, may be stuck in limbo.
Couple that with the fact that global macro concerns persist – especially over the health of the Chinese consumer and (a burgeoning worry) the U.S. consumer – and it’s little wonder Tuesday has been more than bumpy.
The continued smackdown in energy prices has at its root a supply glut that will take time to work through. Crude oil, down 4 percent on the day, reflects the oversupply, though just where there is a floor nobody knows. The drop in energy prices of course implies a recession, or at least the expectation of one, which means that no one will want to borrow money – especially businesses who will not want to expand into slackening demand.
In the meantime, those who may be bargain hunters may swoop in to snap up shares, on occasion, but that bottom picking never comes with surety. Some may point to the fact that bank stocks trade at high single digits, compared to broader market multiples in the mid-teens. But relative value can always move lower.