US Financials "Trade Like Death", Need To Stabilize Soon Or "End Is Nigh"

DataTrekResearch's Nick Colas notes this morning that:

" US large cap Financials trade like death itself. Looking at the weighting of this sector in the S&P 500, they should be nearing a bottom. At a current weight of 12.5%, they are back to trading at their June 2000 low"

And eyeballing the charts, he is absolutely not wrong...

The problem, Colas points out, is that markets may be pricing in something worse than a garden-variety slowdown and the February 2009 low weight was 9.7%, implying, this group needs to stabilize soon, or “the end is nigh” crowd will have one more arrow in their quiver."

In fact, as Colas details details, Large cap Financials are the only reason the S&P 500 is down for the year to date. Not Tech (still up 2.5%). Not Consumer Discretionary (+4.9%). And those two sectors’ returns are enough to offset declines in lesser-weighted sectors like Industrials (-10.4%), Materials (-14.3%) and Energy (-12.7%).

Here is the math:

  • Financials are 13.1% of the S&P 500 and the group is down 12.5% YTD.
  • The group’s average weighting in 2018 is closer to 14%, so that YTD decline is worth 175 basis points of drag to the S&P 500 (12.5% times 14.0%).
  • The S&P 500 is 1.4% lower in 2018, but without Financials its YTD performance would be +0.4% (1.4% plus the 1.8% from the prior bullet).

We’ve covered two reasons for the recent weakness in Financials in these notes (end-of-cycle loan growth data and a flattening yield curve) but we want to add one more today: pronounced weakness in European banks.Three points to consider:

  • The MSCI European Financials Index is down 26% YTD. Most of that decline has come since October, with the group off 18% from late September through today.
  • After shrugging off the first part of this meltdown, US Financials are now catching up quickly. The 30-day correlation between American and European Financials is now 0.76; it was lower than 0.50 in early October.
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