Good news, no help - bank fears rule
There is a tug of war on Wall Street. Bulls are cheering the decline in oil prices. But bears are more loudly showing concern about the woeful state of the financial sector.
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| Shares of financial sector leader BofA had been stuck in a range for most of the year. But the stock has taken a noticeable turn for the worse lately...possibly an ominous sign for other banks. |
NEW YORK (CNNMoney.com) -- Oil is down. The dollar is up. And the Fed is finally talking tough on inflation. It's what everyone has been waiting for. You'd think Wall Street's mood would be one of jubilation.
Alas, that's not the case. It's been a terrible start to June. The Dow suffered triple-digit losses Monday and Tuesday. And even though stocks were up modestly Wednesday, they are far from recovering this week's earlier losses.
Fears that the worst of the credit crisis roiling the financial sector is far from over have resurfaced with a vengeance. And that trumps everything else.
It's been an ugly week for the banking sector. Wachovia's (WB, Fortune 500) CEO was shown the door. Washington Mutual (WM, Fortune 500) stripped Kerry Killinger of his chairman title. Lehman Brothers (LEH, Fortune 500) is rumored to be looking to raise $4 billion in capital and now there are reports that the investment bank may be forced to sell itself.
If all that wasn't enough, ratings agency Standard & Poor's cut its ratings on Lehman, Merrill Lynch (MER, Fortune 500) and Morgan Stanley (MS, Fortune 500) Monday and also lowered its outlook on Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500). Yuck.
So all this raises the question: Even if there is more good news for the market on oil and the dollar, are stocks doomed to stay in a rut until the banking sector recovers?
Unfortunately, that may be the case.....at least for the short-term.
"The financials have to participate to a degree if you expect some sort of sustainable rally. Financials are a big chunk of the broader market," said John Kosar, director of research with Asbury Research.
And it's hard to imagine the financials leading anytime soon.
"This is chapter two in an ongoing not so great story for banks," said Phil Dow, director of equity strategy for RBC Wealth Management. "We'll see more earnings adjustments downward and more dividend cuts. Our best guess is that loan quality problems don't reach their peak until the middle of next year."
Kosar said one troubling sign is that one of the sector's leaders, Bank of America, has taken a notable turn for the worse. The stock had been mainly trading in a narrow range of between $35 and $40 since March. But it recently dropped below the $35 level and is now trading at about $32.50.
"Bank of America had been drifting sideways for a couple of months. And when stocks trade sideways, it indicates investor indecision," Kosar said. "But when a stock comes out of that range, one way or another, that means investors have made their mind up."
"The fact that one of the biggest components in the financial sector is heading down does not bode well for the rest of the group. BofA could be the canary in the coal mine for financial stocks," Kosar added.
Still, there may be some faint glimmers of hope. I've been reporting a lot lately about how there are encouraging signs for the market.
The earnings outlooks for many tech, industrials and even some consumer companies appear promising. It goes without saying that energy stocks are doing well thanks to sky-high oil prices.
The recent sell-off in bonds - yields on the benchmark 10-year Treasury briefly rose above 4% last week - is a sign that investors may be abandoning bonds in favor of stocks. In other words, investors may no longer be thinking that they have to be in "safe" investments and can start taking on more risk.
RBC's Dow said that while it would be nice to see banks get their act together, it's not critical. He added that financials could finally rally in the latter half of this year if there's more evidence that the worst is finally over for the sector in mid-2009. Of course, that's a huge if.
But the key to successful investing is that now, more than ever, appears to be a time where investors should bet on individual companies and not make bold market calls.
"One should be a little cautious with indexes. But you can do ok if you are picking stocks," he said. "Tech has replaced financials as a market leader and energy stocks are doing well. So the market can go up. Financials could just mark water and stay stagnant."
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