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So much for taking the baton from technology to lead the next leg of the market’s nearly unceasing march higher.
Financials on Monday joined the party, but the wrong one if you ask bullish investors, as a decline among the banking sector’s heavyweights accelerated as a part of a more pronounced tumble for the broader market.
The S&P 500’s financial sector SP500.40, -2.49% fell 2.5% on Monday for its worst one-day decline since Aug. 21, when it tumbled 3.4%, according to FactSet data. The exchange-traded fund that tracks that sector index XLF, -2.50% declined 2.5%,.
The top holdings by weighting in the Financial Select Sector SPDR Fund, or XLF, referring to its popular ticker symbol, Berkshire Hathaway’s Class B shares BRK.B, -2.37% were down 2.4%, while JPMorgan & Co. JPM, -3.09% shares were off 3.1%.
The financial sector was led lower by Invesco Ltd., Discover Financial Services, Unum Corp., Lincoln National Corp. and Capital One Corp. In fact, only seven of the 66 holdings in the S&P 500’s financials sector, including MSCI Inc.’s Class A shares MSCI, +1.96% and Allstate Corp. ALL, +0.82%, finished in positive territory on Monday.
Chris Senyek, chief investment strategist at Wolfe Research, in a Monday note said that the slump in financials raises the possibility that the Federal Reserve will have to communicate more clearly its intention to help stabilize the market should the downturn that has swept up the banking sector gather momentum.
“It may take credit spreads starting to ‘blow out’ once again for the Fed to act, but we do believe even more liquidity is coming if the current drawdown in financial markets persists,” Senyek wrote in his research note.
The selling for financials on Monday comes after reports were published alleging many major banks continued doing business with customers despite suspecting money-laundering activities.
The report, led by BuzzFeed News and including other media outlets around the world, was on the basis of what are called suspicious activity reports, or SARS, filed by the banks to Treasury Department, that had been gathered for Congressional investigators to look at President Donald Trump’s 2016 campaign. The banks by law aren’t allowed to comment on the SARs they file.
However, the banking sector, the primary contingent in the S&P 500 financials, has been badly underperforming other sectors during this COVID-19 pandemic period.
Banks have gained since the market’s coronavirus lows in March but the group has performed at a much more subdued clip, compared against other sectors. The financials are the fourth weakest performer, up 34.26%, compared with a 63.41% return for materials XLB, -3.36%, a nearly 60% gain for consumer discretionary XLY, -1.44% and a more than 57% gain in technology sector XLK, +0.83%, according to Dow Jones Market Data.
The downturn for financials undermines hopes by bullish investors that banks would do their part, after lagging behind, to take the lead in the next phase of the market’s ascent to new heights after tech-related stocks reached nose-bleed levels.
That’s why the decline in financials is perceived by some market participants as a bad sign if the market’s momentum upward is to continue.
“While the Tech move has gotten overdone and not moving down as quickly, the movement in Financials in particular looks like a big deal and quite negative across the board that’s a definite headwind for SPX and U.S. indices,” Mark Newton, a technical analyst at Newton Advisors wrote on Monday.
The slide on Monday comes as financials were having a relatively middlingSeptember slump, down 5.1%, that saw the group hit less severely than technology and energy shares XLE, -3.31%, which are facing more than 10% month-to-date drops. Communication services and and consumer discretionary stocks were down more than 9% so far in September.
Investors in banks also have been on edge as the Fed said it would analyze large banks’ ability to withstand two coronavirus-related recession scenarios as part of a second round of stress tests later this year. The tests also raise the question about whether the regulator will be inclined to allow banks to distribute cash to shareholders via buybacks and dividends.
Fed Chairman Jerome Powell has described the outlook for the economy from the COVID-19-inspired recession as a long and challenging one, particular if there are challenges in obtaining a fresh round of stimulus in Washington for out-of-work Americans. The death of legendary Supreme Court Justice Ruth Bader Ginsburg may only complicate those talks, experts say.
Read: Why the Dow dived: Ginsburg replacement battle amplifies election jitters
A low interest-rate environment, with benchmark interest rates expected to hold at a range between 0% and 0.25% for at least the next two or three years, also may not provide the most felicitous environment for the banking sector.
