Rodney covered the “L is for Losers” side of the Fed-manipulation game. So I’ll take a look at the big winner.
That’s the financial sector. Sort of.
Let me explain…
Rodney’s right. With the Fed-manufactured profit spread of 3.5% to 4.5% (the difference between what banks charge and payout in interest), big banks seem to be getting an undeserved advantage.
This preferential treatment has no doubt helped the likes of Goldman Sachs and JP Morgan Chase post some pretty impressive earnings recently. Goldman earned $5.60 a share in Q4 2012 versus just $1.84 in Q4 2011. JP Morgan brought in $5.7 billion in the fourth quarter, a 54% increase year-over-year.
Plus, the SPDR Financial Sector ETF (NYSE: XLF), a proxy for the financial sector in general, gained 23% in 2012.
So all’s well with financials… right?
Well, despite the cheap-money train that goes from Washington to Wall Street, financial stocks are still struggling to recover to their 2007 highs while the rest of the market’s eight sectors already have.
Here’s a chart I shared with you back in July of 2012 (No Recovery in Sight for Financials), with updated prices…
The thick white horizontal line marks the 2007 highs. Each of the market’s nine sectors is shown in percentage terms relative to this high.
As you can see, five sectors (Consumer Discretionary, Consumer Staples, Healthcare, Technology and Energy) are now higher than their respective 2007 peaks. And three sectors (Industrials, Materials and Utilities) are very close to reclaiming their 2007 highs.
The outlier, still, is the financial sector. XLF is off its 2007 high by 51%.
There’s good reason for this. While the Fed’s free money is helping some big banks boost profits, investors are still shunning the sector. It goes back to the saying, “Fool me once, shame on you. Fool me twice, shame on me.”
Financial stocks are paying what I call “perception penalty fees” for burning investors so badly in the years leading up to 2007/08.