No-confidence vote: Investors bail on financial stocks again

Financial stocks led the way down in the first year of this vicious bear market. Now it seems they’re intent on leading in Year Two as well.

A sell-off in bank, brokerage and other financial issues dragged the market lower Monday, deepening a decline that has clipped 12.4% off the financial-sector index of the Standard & Poor’s 500 over the last five trading days.

That’s by far the worst performance of any of the 10 major industry sectors in the S&P 500, and it’s more than twice the 4.9% drop in the S&P 500 as a whole in that period.

More troubling is that the financial-sector index, which includes 84 stocks, now is just 2.5% above the 12-year closing low it set Oct. 27.

Wall Street optimists who believe the bear market is over have been counting on major share indexes to hold above their October lows, to confirm that the worst of the selling has passed.

The S&P 500 itself, at 919.21 on Monday, was 8.3% above its closing low Oct. 27.

A slide through the October lows by the S&P financial index would be a bad sign, said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research in Cincinnati.

"That’s one of our major concerns" for the market, he said. "The financials are starting to break down once again."

One way to look at it: The latest sell-off is a vote of no confidence by investors, despite the trillions of dollars that the federal government has thrown at the financial system this year to end the credit crunch and keep lenders from failing.

Citigroup Inc. shares fell to a new 12-year closing low of $11.21 on Monday, down 5.2% for the day. Goldman Sachs Group slid 8.4% to $71.21, the lowest since 2003. Credit card giant Capital One Financial dropped 5.8% to $32.56, also the lowest since 2003.

All three companies are among those that have received capital infusions under the Treasury’s plan to bolster banks’ finances.

In Goldman’s case, investors were reacting to analysts’ warnings Monday that the investment banking powerhouse is likely to post a loss in the current quarter -- which would be the firm’s first unprofitable quarter since it went public in 1999.

Other news from the financial sector also set a grim tone. Fannie Mae, which was essentially nationalized in September, said it might need more than the $100 billion the Treasury already has committed to keep it afloat.

And the Bush administration was forced to overhaul its bailout of insurance titan American International Group, boosting the cost to about $150 billion.

"They had to go to Plan B" to save AIG, said Joe Battipaglia, chief investment officer at investment firm Stifel, Nicolaus & Co. in Yardley, Pa. "That’s not a confidence builder" for investors in financial stocks.

Indeed, with many banks expected to take another round of massive loan write-offs this quarter, investors may already be wondering if the companies in 2009 will be heading back to the Treasury for a second helping of taxpayer money -- with the end result that shareholders would surrender more of their stakes in the businesses to Uncle Sam.

Photo credit: Nick Ut /Associated Press