Yes, things could be worse.
Tobacco stocks have fallen 55% this year; waste management has dropped 62%; and some health-care stocks are down 70%. Those figures make banks look almost good, considering that regional bank stocks were down only 19% and the largest banks 16.5%.
But historically it is a sad story, and as yearend approaches the momentum is sharply negative. In the week that ended Dec. 17, financial company stocks were the worst performers among the Standard & Poor's 500 companies.
"This looks to be the worst relative performance for banks in 40 years," said Michael L. Mayo of Credit Suisse First Boston, who has been bearish on the sector since spring. He said that in most previous years of poor bank-stock performance, the overall market also declined.
Indeed, bank stocks are collectively trading at only about 50% of the S&P 500 on a relative price-to-earnings basis. They more typically trade around 70%.
Through Friday, the Standard & Poor's 500 stock index, the standard barometer of the market, was up 15.6% for the year. In contrast, the American Banker index of the nation's 225 largest banks' stocks was down 11.7% and the top 50 banks 8.7%.
Most market indexes are up. The elite companies of the Dow Jones industrial average advanced 22.6% during the same period, and the Russell 2000 index was up 10.5%. The Nasdaq composite index, salted with high-flying technology stocks, soared 71.1%.
Last week financial stocks were the worst-performing sector of the S&P 500, as bond market yields jumped on concerns of higher interest rates ahead. And within the sector, the largest banks had the worst week, falling 8.1%.
The continuing weakness in banks is all the more extraordinary because it does not reflect concerns about loans going sour, the industry's traditional Achilles' heel. Instead, overly optimistic earnings expectations are the biggest culprit, according to Michael A. Plodwick of Lehman Brothers.
"Everyone got spoiled" during the banks' extraordinary earnings run from 1995 through 1997, he said. Expectations of perpetual 14% to 15% annual earnings growth were never realistic. Instead, "the more rational view is for 8% to 12% growth," he said.
Yearend tax-loss selling and portfolio window dressing has intensified banks' fall in recent weeks. Yields have also been rising in the bond market on worries that the economy is overheating and the Federal Reserve, which met Tuesday, would signal higher interest rates.
To be sure, analysts said, financial stocks have looked especially bad this year because of the rising rate environment, while market indexes have simultaneously been elevated by the dizzying gains in computer and Internet-related stocks. The 65.3% rise in the technology sector of the S&P 500 this year, through Friday, was triple the 21.3% gain of the next best sector, basic materials.
The dramatic valuation damage to banks cannot be denied, particularly since so much of it has occurred recently. The S&P money-center banks fell 8.1% last week alone and were down 12.4% in December, through Friday. Major regional banks dropped 6.2% last week and are down 12.4% in December.
Besides banks, the S&P financials include stocks of insurance brokers, down 0.1% last week but up 29.5% in the year to date, and diversified financial companies, down 4.8% last week but up 26.4% for the year, as well as other groups of financial services firms.
Wall Street professionals point out that the S&P major banks category includes First Union Corp., whose shares were pummeled on earnings disappointments, but does not include Citigroup Inc., which is now classified as a diversified financial along with companies like Morgan Stanley Dean Witter and Fannie Mae.
The major regional bank group includes Bank of New York Co. and Mellon Financial Corp., both large trust and custody-oriented companies whose shares have been relatively solid performers. But it also includes Bank One Corp. and U.S. Bancorp, which have been hit hard.
Is a turning point near for the beleaguered banks? Katrina Blecher of Brown Brothers, Harriman & Co. in New York pointed out that banks have traded at 50% of the S&P 500 multiple twice in the past decade, most notably in October 1990. Each instance was the beginning of better times for the sector.
"There has to be some nibbling, just based on these low valuations," Ms. Blecher said.
But Lawrence W. Cohn of Ryan, Beck & Co. in Livingston, N.J., said the banks' relationship to the S&P's elevated multiple - 31.6 times earnings on Nov. 30 - is not as useful a tool for investors as in the past.
"What has happened is that the market multiple has soared and is being driven by factors that don't bear directly on the banking industry," he said.