Comparing financials today to techs back then may not be the most reassuring exercise in the world -- but it's instructive nonetheless. After all, the trajectories of both sectors in the wake of their respective blowups (dot-com and credit) have been kind of spookily similar, Tobias Levkovich, Citigroup's chief U.S. equity strategist, told clients in a recent report.
"The [tech] sector collapsed by 83% from its 2000 peak to its 2002 trough, while financials plummeted by 84% from 2007 to 2009's low," Levkovich writes. "Both had impressive bounces in the recovery year with some [low-quality, volatile names] rebounding by as much as sixfold in very short order."
Priced for Extinction, Then for Survival
History doesn't repeat itself, but it rhymes often enough when it comes to stocks. And Levkovich contends that in both cases it's the same old dynamic at play: At the bottom after a bubble bursts, the sector in question gets "priced for extinction." When the sector doesn't just up and die, it goes through a process of being repriced for survival.
Financials are working through this repricing process now, Levkovich says. But as for further upside from here? Well, if the history of tech stocks offers any clue, it could be ages before financials finally get "priced to thrive" once again.
"The rules of the road became deeply unknown, and the tech sector suffered for it by no longer providing leadership from 2004 through about 2007," Levkovich writes. "In many ways, the financials sector is now going through similar soul-searching, but it is even further complicated by government influence and regulatory [uncertainty]."
Heaven knows the financial industry's revenue picture is cloudy enough as it is, Levkovich notes. Banks make money by extending credit, yet throughout the world, the private sector is deleveraging like mad. It's also a good bet that there'll be fewer lucrative equity and debt offerings to underwrite. And while dealmaking -- a generous source of fees -- is picking up, can it regain the highs of the recent past when credit was easy and cheap?
No Intriguing Trend
Add uncertainty regarding regulatory overhaul -- from the proposed "Volcker Rule" to consumer protection to capital reserve requirements -- and, well, it's hard to be all that bullish on the sector. "Financial industry regulatory reform . . . casts a pall over the sector as business executives cannot truly plan strategically if the rules of the road are not yet written or are constantly changing," Levkovich writes.
At some point, the Federal Reserve will raise interest rates, putting pressure on asset values and "limiting the ability for financial stocks to soar," Levkovich says.
It's not that there is no good news or potential in financial stocks, Levkovich says. It's just that there's no particularly intriguing trend. Traders might suss out some short-term opportunities in individual picks or subsectors, but financials as a whole look to be no better than a market-performer for a good long while.
