Bank stocks just hit a record — a record of losses.
The S&P 500 Financials Index fell for the 12th straight day Tuesday, the longest losing streak on record. Coming into the year, many cited the tax overhaul and a rising rate environment as reasons for banks to rally. Instead, they’ve endured pressure from a flattening yield curve. The losses also come ahead of the final phase of the Federal Reserve’s annual stress tests and waning consumer confidence.
“They’re facing a rising rate environment, which historically has been fairly positive for banks,” Mona Mahajan, U.S. investment strategist at Allianz Global Investors, said on Bloomberg Television. “What we’re seeing here is the shrinking yield curve is actually not a good sign for the banks. Obviously, they like to borrow short, lend long, and if that yield curve is shrinking, that margin goes down as well.”
The S&P 500 Financials Index fell 0.4% to close $443.50 Tuesday.
Investors are taking note too, yanking cash from the largest exchange-traded fund tracking U.S. financials. The Financial Select Sector SPDR Fund has seen eight straight days of outflows, the longest streak in two years. Together, that’s amounted to nearly $1.8 billion in withdrawals from the fund, about 6% of its total market cap.
In addition to a flattening yield curve casting a shadow over bank profits, the 2018 Comprehensive Capital Analysis and Review (CCAR) stress tests loom ahead of Thursday results. That’s when the Federal Reserve approves or rejects banks’ plans to return money to shareholders through higher dividends and share buybacks. All 35 banks tested passed the first round of tests last week, but not every one cleared the bar by a comfortable margin.
"The Fed stress tests are proving to be a ‘sell the news’ event as the yield curve collapses," said Dave Lutz, head of ETFs at JonesTrading Institutional Services.
What’s more is that U.S. consumer confidence fell in June, a signal that could affect the path of interest rate hikes this year and beyond. Although the Fed is largely expected to raise rates at its meeting in September, the probability for a rate hike at that time has come down from 81% on Thursday to 78.8%.
"Fed officials are narrowly split on the need to raise rates three or four times this year,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York. “Diminished confidence readings on the consumer may be all it takes for one Fed official to change their vote. This decision to hike rates in September isn’t a done deal yet."
The pain has been felt even more drastically overseas, particularly in Europe where weaker economic data has proved concerning. The STOXX Europe 600 Banks Index has almost fallen into bear market territory, down more than 18% since its January highs.
To Matt Maley, an equity strategist at Miller Tabak, the weakness portrayed by the European banks is a warning signal that isn’t receiving the attention it deserves.
“The action in this group compared to the U.S. banking group reminds us of what took place in late 2016 and the first half of 2017. They both rallied together for a while, but then the European stocks accelerated higher and then the U.S. banks followed them higher,” he wrote in a note to clients Tuesday. “This time, they both sold off in the first quarter and now the European stocks are accelerating lower. Will the U.S. banks follow them once again?”
