Bad News may be Baked Into Financial Services ETFs

While U.S. banks have some exposure to over-leveraged oil companies, the level of exposure to the distress energy industry is not up to the scale of the U.S. housing market that triggered the 2008 run. Previously, the Federal Reserve’s decision to hold off on an interest rate hike, ongoing economic weakness and concerns over trading revenues have weighed on the financial sector’s outlook.

Markets may be trying to discern shapes in the shadows where there are none, overreacting to the recent spate of economic weakness. For instance, banking analyst Mike Mayo argues that Wall Street banks are trading at “recession prices but no recession.” On a price-to-tangible book value, banks have dipped to levels below pre-financial crisis, and some bank stocks are now trading below book value.

“Within the financial sector, bank names have fallen 23 percent this year. As stocks dropped 1 percent on Thursday, banks saw even more pain, falling more than 4 percent even as major lenders have traded below their tangible book value,” according to CNBC.

Financial Select Sector SPDR