Resist the Urge to Buy Financial on the Dip

Brittney Barrett |

If this week is anything like the last, yesterday’s massive dip will lead to an inevitable upswing as investors continue to assess the hazy economic landscape. The depleted price of financial stocks especially, will encourage a conversation regarding the appeal of these enterprises, based on valuations. Admittedly, the bottom levels reached yesterday by major banking institutions does increase their appeal in terms of fundamental metrics, but for every reason there is to snap up these stocks there’s another to wait it out.

The low prices right now are accompanied by uncharted territories so many traditional valuations do not apply here. The financial sector in particular has entered into a bear market, or is over 20 percent off from recent highs. A broad financial sell-off ensued in April and optimism regarding a potential recovery has slowly lost steam.

The most recent data indicated global economic slowing and illuminated the dire reality surrounding European debt contagion. A potential credit downgrade in France and weak economic growth data in Germany continue to stand as unresolved stresses on the global economy. Even China, which boasts the fastest growing economy world-wide and is a major global driver, has begun to see its housing market lose momentum.

These factors, alongside the most recent U.S. credit downgrade from the S&P place us in uncharted territory. That said, bank stocks, while they are inexpensive are not necessarily a deal, at least for the short term.  Financial stocks are trending down for the year and the technical indicators, of which there are many, seem to point lower.

Both Goldman Sachs and Morgan Stanley have reduced their expectations for U.S. growth in the last month, with the former anticipating a one-in-three chance of a double-dip recession. The U.S. housing market also recently came in with weak data, challenging the notion of the initial recovery period.

Both unemployment and housing have been recovering at a rate well beneath initial expectations, meaning financial institutions would have even more ground to make up in the event of another recession. The continued strain on these areas has kept people wary of the banking stocks, and for good reason. While many of the heartier sectors have experienced a recovery in brighter times this year, banks have continued to underperform. While tech and other hard-hit sectors regained some vitality after the deep dips, banks edged higher. The banks were bargain bin, high risk buys, because they're advocated for by several big name investors, Warren Buffett among them, some investors were more likely to take the leap.

Those outside the immediate financial sector; however, have shown resistance. The support for banks is largely based on pricing metrics set an earlier time. In this new terrain; however, banks have the potential to reach new, unprecedented lows from which there looks to be little short-term relief.

 

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

Companies

Symbol Name Price Change % Volume
TMD.WT.F:CA Titan Medical Inc. Warrants 0.05 0.00 0.00 0
C Citigroup Inc. 60.04 -0.11 -0.18 22,804,941
MS Morgan Stanley 43.73 0.15 0.34 12,115,063
JPM JP Morgan Chase 85.49 0.37 0.43 14,567,202
GS The Goldman Sachs Group Inc. 241.85 0.40 0.17 5,456,047

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