This morning, the Dow Jones Industrial Average climbed 100 points in early trade to reflect a bullish sentiment in a relatively uncertain market.
The only sector not participating in this rally? Financials. On an otherwise strong day, JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and other big banks are all down by about 1%. An upward move with one sector lagging, particularly the financial sector, can be very good news or very bad news.
On one hand, it’s good news because the market seems to be behaving rationally again. Financial stocks should drop with impending financial regulation in the U.S., especially when we’re not sure exactly what the regulation will entail or how strictly it will be enforced (it looks like there’s still a bunch of wiggle room in the current senate and house bills).
Lately, though, the market has been dropping across the board on fears of contagion from the European financial sector. Maybe I’m daft, but I just don’t understand how the troubled European financial system affects the price of eggs in California. All it really means is that eggs in California are now a more attractive value play.
On the other hand, weakness among financials is bad news because, historically, that sector has been an economic leader. When there are financial troubles, it’s felt throughout the economy. If financial regulation were to cause a large selloff in the financial sector, we would likely feel the reverberations across the entire economy.
One might argue that we’re learning from history so that we don’t repeat it. On the other hand, one might argue that we’re going down a path which invariably leads to a double-dip recession and a crash reminiscent of late 2008. Personally, I’m not sure if the banks learned their lesson, and if they didn’t, strict financial reform is necessary. Nevertheless, it’s important to be careful how we approach the subject, because a panic is the last thing that an already uncertain market needs.
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