By Christian Berthelsen and Brett Philbin
Financial sector investors are seeing a glass half full, with
sharp gains for many large banks and brokers in the final trading
days of the year despite a cautious outlook for the sector in
2013.
Indicators for the sector are neutral at best, with analysts
issuing tepid outlooks for 2013 amid low interest rates and new
regulation likely crimping revenue. But financials are the
strongest-performing sector within the S&P 500 this year, and
several individual stocks hit multiyear highs in recent
days--including Bank of America Corp. (BAC), which officially
doubled in value year-to-date on Tuesday.
Bank stocks in the S&P 500 index have risen more than 20%
this year, outpacing the equities markets as a whole. In addition
to Bank of America, Citigroup Inc. (C) and Bank of New York Mellon
Corp. (BK) are trading at multiyear highs, and J.P. Morgan Chase
& Co. (JPM) shares have recovered all of their drop and more
following the bank's May 10 disclosure that it was losing billions
on a wrong-way bet on synthetic corporate credit derivatives.
Financial shares got an additional boost Tuesday when markets
got a first look at fourth-quarter results for Jefferies Group Inc.
(JEF), which reported a 48% rise in profit on strong trading
revenue. Jefferies is the first U.S. investment bank to report
fourth-quarter results, and is often viewed as a harbinger of
performance at other securities firms.
Jefferies shares were up 3.1% on the day and are up 52.8% in
2012.
The rise has come despite an industrywide outlook that could be
described as neutral at best. For universal banks with big capital
markets operations, Keefe Bruyette & Woods estimated last week
that strict new rules around proprietary trading could reduce
trading revenue by 20% across the industry.
Trading volumes and deal flow have been much improved from dire
year-ago levels amid the European debt crisis but have been largely
flat with the previous quarter. Investigations and litigation still
loom over the industry for everything from alleged interest-rate
manipulation to faulty mortgage lending. And the low interest-rate
environment that has resulted from Fed stimulus efforts to boost
the economy is cutting into profits from lending and investment of
surplus deposits.
Still, despite the overall dim outlook, analysts and traders say
there are some bright spots on the horizon contributing to the
run-up, including optimism that policy makers will resolve the
so-called fiscal cliff of tax hikes and spending cuts before they
whack they economy, a positive outlook for U.S. economic growth in
2013 that should help bank performance and continued recovery in
the housing market.
Improving credit quality will likely lead to releases from loan
loss reserves, which flow straight to the bottom line, and several
banks have improved chances of having share buyback and dividend
payment plans approved following Fed stress tests early next
year.
People are "feeling better about the housing market, the economy
in general, and the natural way to play that is through financials,
especially banks, which are highly levered to an improving economy
and housing market," said R.J. Grant, assistant director of equity
trading at KBW and a specialist in financial shares.
Rather than a bullish case for an industrywide rally, what may
be sparking the run-up has been good news out of individual
companies, such as the cost-cutting initiative at Citi under new
Chief Executive Mike Corbat (the bank announced 11,000 layoffs
earlier this month), or BofA finally breaking back above the
$10-a-share level on Dec. 5.
Steve Sosnick, an equity risk manager at Timber Hill, the
market-making unit of Interactive Brokers Group Inc. (IBKR), said
the recent rally has come "without an obvious catalyst," but that
the individual hits have turned into a sectorwide rally.
"I think it's a momentum trade, not really a fundamental trade,"
Mr. Sosnick said. Still, he cautioned that momentum trades
typically "work until they stop," adding that he sees nothing to
tell him why Goldman Sachs Group Inc. (GS) is worth nearly $8 a
share more on Tuesday than it was as of Friday's close.
Write to Christian Berthelsen at
christian.berthelsen@dowjones.com