As European leaders grapple with the credit crisis, you might think that some of the worst-performing areas of the market would be located in the troubled region.
However, Mr. Market loves to confuse and surprise. Take a look below at the price ratio of the iShares Dow Jones U.S. Regional Banks (NYSEArca: IAT) relative to the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA). For those unfamiliar, a rising price ratio means the numerator/IAT is outperforming (up more/down less) the denominator/DIA.
Regional banks are, well, regional and thus one might think should not be as impacted by the European crisis as other more global sectors. However, as we can see from the chart, U.S. regional banks have fallen apart in the summer plunge. From July 21 through Aug. 12, the regional banks ETF is down about 20%. By comparison, the Dow ETF, which is more global in terms of revenue and earnings exposure, is down 11.26%.
What might explain the substantial relative decline?
First, it’s important to notice that the price ratio has been trending lower really since early January despite an otherwise bullish market earlier in the year. One might argue that the credit downgrade by S&P of U.S. sovereign debt might explain the drop since regional banks surely hold a substantial portion of their assets in government debt, however as any chart of Treasuries will show, yields actually went down. Bond prices and yields move in opposite directions.
Whatever the reasoning is, Mr. Market has decided to focus its attention on regional banks independent of actual fundamental exposure. Who says markets are logical?
Disclosure: The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The article does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.