Investors appeared to pursue contrarian strategies en masse in trading on Tuesday, driving the ailing financial sector higher after Monday’s crushing lows. Banks climbed nearly 8 percent on Tuesday, nearly regaining the 10-plus percent loss endured after the S&P announced its decision to slash the U.S. credit rating to Aa.
Markets bucked historical expectations and ignored the long list of ails facing banks to inspire a resurgence in the financial sector. The biggest driver perhaps was the assurance that the Federal Reserve would extend interest rates at their current low levels until around 2013.
The announcement led to a seemingly backwards reversal, with the companies least-tired to the economy, including consumer staples and utilities climbing only slightly and banks, still embroiled in mortgage lawsuits, a weak housing market and other challenges having one of the best days in recent history.
The bank with one of the higher percentages of exposure to the ongoing crisis, Citigroup (C) was among the most impressive performers of the day. Investors appeared to dismiss the massive mortgage exposures and customer information breaches that led the stock to lows on Monday.
Bank of America (BAC) was also the benefactor of short term memory loss. Shares ascended close to 17 percent on the latest interest rate announcement in spite of yesterday’s news that American International Group Inc. (AIG) would sue the North Carolina financial institution for the tune of $10 billion to recoup for losses on mortgage-backed securities.
One argument in favor of banks is that infrastructural changes since the 2008 financial crisis have prepared firms to more successfully endure a recession. Among the differences between 2008 and today, is that the potential crisis lies more in the weakness of the Euro than the sluggish housing market and bad mortgages. The S&P said that increase earnings and higher asset quality and capital could be expected to drive banks to more successful third quarters, a statement that coupled with the interest rate news overshadowed lingering worry surrounding the faltering economic growth and sovereign debt issues.
Bulls ruled the day and gains piled atop one another to bring the Financial Select Sector SPDR ETF (XLF), which tracks the financial stocks trading on the S&P 500 Index up 7.8 percent. Contributing to the rise was the world's second largest bank J.P. Morgan Chase (JPM), which by virtue of an account set-aside with funds, has the capacity to soften the blow of lawsuits in the vein of Citigroup's mortgage complications.
American Express (AXP) also regained its own losses, reflecting the optimism of the remainder of the sector. Whether financial companies will be able to maintain these gains is another question. Tomorrow will be telling in terms of whether today's results were a short-term attempt by investors to nab bargain bin financials and short-sell once they reach pre-crash levels or if the interest rate announcement has revived interest in the sector.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer