Banking blowout

Dow Jones US Banking Index compared to S&P 500, year to date 2012

The Dow Jones US Banking Index ($DJUSBK) is intended to reflect the health of the American banking sector. Consisting of no fewer than 823 banking shares, this broad index (black line) is up almost 29% YTD while the S&P 500 (SPX, red line) is “only” up about 12% as illustrated in the chart. What’s going on?

There are two schools of thought here: first, the stock market, of course, is a leading indicator. Since the recession officially ended in June 2009 the S&P 500 is up about 33% while the The Dow Jones US Banking Index is actually down some -6%. So maybe the banking sector is playing catch up to the broader index.

Another way to view it: for the period 2007 to 2011 the S&P 500 lost -11.33%, while The Dow Jones US Banking Index was down -70.49%. For 2011 the S&P 500 lost -1.09%, while the $DJUSBK was down -28.20%. In other words, the banking sector saw enormous losses even while most other industries recovered from the recession and have returned to profitability. Now that all but four of the US banks tested passed The Fed’s stringent stress tests, investor confidence is returning to the banking sector. Some of the shares comprising The Dow Jones US Banking Index are up 400% or more YTD.

So US equity markets booming, strong dollar, recovering Europe, good news all around? Some folks think nothing has changed and we’ve already set the stage for the next big financial crisis. I have to say I’m in the latter camp; we’ve injected far too much money into the system in far too short a period of time for there not to be ramifications. How bad the payback will be is for another post.

Comments are closed.