February Commentary: Financials Feel the Brunt of Uncertain Times
Markets weakened last week as investors digested new fiscal packages
By Natalie Trunow, Senior Vice President, Head of Equities
Calvert Asset Management Company, Inc.
Recent housing figures show that the U.S. real-estate market has lost about $2.4 trillion since its peak in 2007. We believe, especially given recent increases in the jobless rate, that there will easily be another 10% to 15% downward move before housing prices stabilize. In dollar terms, that’s another $1.5-2 trillion, making a total of over $4 trillion in home equity coming out of the real estate market since the top. This will continue to hurt consumers who are highly leveraged on their homes and who continue to fuel foreclosures, and will further intensify the impact on banks’ balance sheets, where securities leveraged to shrinking home equity reside.
These numbers put the amount of stimulus recently passed by the new administration into perspective and help explain why investors are still nervous about the sector—as well as why government may be required to nationalize more financial entities. To make matters worse, recent proposals to allow mortgage workouts to be made in bankruptcy court raised worries of spiking default risk, further darkening the outlook for banks and lenders.
Not surprisingly, Financials—especially larger cap names—have led the market downward and were down 18% last week and 40% for the year. The S&P 500 was down 7% for the week, with all sectors in negative territory. As consumers and corporations are still under threat of defaults, Financials are not likely to see a sustained recovery any time soon. While we did see investors re-enter the sector periodically in 2008 hoping for a rebound, they have not done so yet this year. The added uncertainty of changes in the regulatory treatment of banks, including the possibility of nationalization, makes investors particularly uneasy about financial stocks. Much like in the fourth quarter of 2008, the sharp deterioration of the market and the ever-increasing probability of bankruptcy-type workout solutions for U.S. auto-makers fueled a flight to safety, which is reflected in the rallies in U.S. Treasurys and gold.
With equity indexes flirting with their November 2008 lows, if positive catalysts don't emerge soon, markets are at risk of seeing another leg down, at which point bouts of panic selling and high volatility levels may return. From a technical standpoint, if markets hold at these levels, a rebuilding process can begin from which equity markets may recover.
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