NEW YORK — Shares of financial companies dragged the general market lower for the start of September, with shares of American International Group Inc. leading the drop-off.
AIG - which saw its shares more than triple in August on increased optimism - pared some of those gains Tuesday. Sanford Bernstein analyst Todd Bault cut his rating on AIG shares to underperform from market perform, citing risk that the government may reduce its support of the bailed-out insurer soon. Shares recently dropped 17% to $37.62.
Celent analyst Donald Light said the general selloff in insurers Tuesday could be sentiment that a recovery is still a ways off for that sector.
"We're going to have to wait for a more robust recovery or maybe a recovery at all," Light said. He added that life insurer shares will likely follow the fortunes of the equity markets closely, while property/casualty insurers need to see significant improvement in car sales, home sales and employment data.
"I think the underlying economics for the insurance sector are not a lot different today than they were in the month of August," Light said. "I see today as more of a psychological selloff."
Along with AIG, the top insurer decliners included Genworth Financial Inc. and Hartford Financial Services Group Inc., both down about 9%. Lincoln National Corp. dropped 6.7%, while Triad Guaranty Inc. fell 10% and PMI Group Inc. declined 12%.
Mortgage lenders Fannie Mae and Freddie Mac also traded lower, off about 14% each following downbeat comments from FBR Capital Markets analyst Paul Miller. In a note to clients, Miller said that "there is no fundamental value remaining" in the companies.
Struggling commercial lender CIT Group Inc. fell 13% to $1.51 as it said it will defer a Sept. 15 interest payment on notes due in 2067.
Regional banks also traded lower, including Zions Bancorp, down 7.1%, and SunTrust Banks Inc., down 6.6%. Among the big banks declining: Citigroup Inc., down 7.2%, and Bank of America Corp., down 5%.
Electronic brokerage firm E*Trade Financial Corp. fell 14%.
The market got a brief early boost from the Institute for Supply Management's monthly manufacturing index, which rose to 52.9 in August, the highest reading since June 2007 and the first to top 50, the level indicating growth in the factory sector, since January 2008. A gauge of future home sales was also stronger than expected.
"Traditionally, as economics news hits bottom, it's said to be a good time to buy financials," Motley Fool analyst James Early said. "As economic news picks up, it's a better time to be in other items. We could be gradually exiting the period where the easiest money is made in financials."
Early added the market has been experiencing the "greater fool investment theory," with stock gains not driven by fundamentals but by the idea that an investor might be a fool to buy a stock, but if it can be sold to a "greater fool," the investor is fine.
"The prices of financials haven't moved in lockstep with fundamentals," Early said. "Therefore, there's a strong element of speculation involved."
Early added that while financials have been strong recently, he doubts they can continue this pace and noted September has traditionally been a weaker month for the market.
"There is this ongoing exuberance that people are willing to participate in but everyone knows has to come to an end at some point," Early said, adding that the tide could be shifting toward people looking for a reason to get out of stocks instead of looking for a reason to get in.
Meanwhile, Rochdale Securities analyst Dick Bove said investors should get defensive on financials in the near term. He told Fox Business Network that January could be a potentially good time to re-establish positions; he cited better prospects in 2011 and 2012.
"The problem is that (the banks) are not going to earn any money in the third quarter, and they're not going to earn any money in the fourth quarter, and it's questionable whether they're going to earn any money in the first half of next year," Bove told Fox.