Financial stocks could be in for a rocky ride if the market is faced with more weak economic data, and banks could bear the brunt of it, according to some experts.
Even as financial stocks recovered from last weeks downturn and the broader stock market got a boost from Mondays Supreme Court ruling in favor of George W. Bush in the fight for the Presidency, some strategists are predicting a weakening economy will drag financial stocks down in the coming months. Last weeks report that the gross domestic product annual growth rate slowed to 2.4% caused concern. Some analysts said that a predicted economic soft landing may evaporate, which would cause a slowdown in earnings and increased concerns about credit quality in the banking sector.
Francois Trahan, a sector strategist at Brown Brothers Harriman & Co., said the chance of a hard landing is remote but a further significant slowdown in the GDP could be bad news for financial stocks.
However, Mr. Trahan said he is confident that a predicted Federal Reserve Board interest rate cut early next year will give financials the green light.
Investment banks and money-center banks are unattractive, while pure interest-rate sensitive stocks like Washington Mutual Inc., American Express Co., and Progressive Corp., are better buys, he said.
In a report issued Friday, Scott J. Brown, an economist at Raymond James & Associates in St Petersburg, Fla., said the market overreacted to a lot of last weeks data.
The market has seized on every minor piece of evidence as a sign the apocalypse is upon us, he wrote.
For example, the 0.2% drop in consumer spending in October is insignificant, and orders for manufactured durable goods, which decreased 5.5%, is an extremely volatile number, Mr. Brown wrote. All of those reports added to the markets woes, he said.
On Monday the U.S. Census Bureau reported new home sales dropped 2.6% in October, and the Conference Board announced that the Index of Leading Indicators fell 0.2%.
David W. Allaire, co-portfolio manager of the Imperial Financial Services Fund in Providence, R.I., said that a hard landing is already priced into the financial sector. He said he also favors the thrift sector, community banks, and insurance companies.
But other analysts had much more negative comments about the banking sector. Adwin Walczak, portfolio manager of the Vontobel U.S. Value Fund at Vontobel USA Inc., the U.S. branch of the Vontobel Holding AG in Zurich, said that persisting credit quality issues have made him shy away from the sector into the considerably safer insurance area.
Sixty percent of the funds holdings are in financial stocks, but only about 1.3% of the holdings are in bank stocks, all of that in Wells Fargo & Co., he said. The San Francisco banking company is undervalued, Mr. Walczak said.
The American Banker index of top 50 banks dropped 1.23% Monday, while the index of 225 banks fell 1.9%. Last week the index of top 50 banks rose 5.7%, and the index of 225 banks climbed 6.34%.