Many financial sector exchange traded funds (ETFs) and Wall Street want the Federal Reserve to lower interest rates again. Learning Merrill Lynch (MER) had to write off $7.9 billion in losses tied to mortgage-related securities surely helps the cause.
October is looking like a scary sequel to summer’s market turbulence. Financial stocks are again being repriced lower because of the ongoing fallout from defaults on subprime mortgages and the resulting drop in the market value of fixed-income securities tied to loans gone bad, reports Adam Shell for USA Today. The gains made from the initial rate cuts have been erased as many bad profit reports from major U.S. banks have come out, showing massive losses and outsized exposure to complex financial instruments tied to imploding subprime loans. Traders also fear that more losses will be announced by firms still holding hard-to-sell, hard-to-value mortgage-related securities. One hope for many financial stocks and ETFs is for the Fed to cut rates again to relieve rate stress.
Beat-up sectors such as financials and housing related ETFs especially would benefit from another rate cut. Some examples and their year-to-date performance include:
- KRW Bank Index (KBE) – down 11.2%
- Financial Select Sector SPDR (XLF) – down 8.8%
- Vanguard Financials (VFH) – down 8.7%
- iShares Dow Jones U.S. Home Construction Index Fund ETF (ITB) – down 51.1%
- SPDR S&P Homebuilders ETF (XHB) – down 40.2%
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.