Hopes are again being dashed that financial stocks can break out of a two-year funk after weakening growth in employment spurred speculation the Federal Reserve will have to stand pat on interest rates.
A 2.2 percent selloff in financial shares in the S&P 500 Index caught off guard investors who anticipated that tighter monetary policy as soon as this summer would bolster the outlook for earnings at banks and insurers. Short interest on the most- traded financial exchange-traded fund slid to 1 percent of shares outstanding, down from a high of 7 percent in January, data compiled by Markit and Bloomberg show.
The prospect for lower rates for longer sent Treasury yields plunging and weakened the dollar. Lower interest rates and bond yields curbs lenders’ earnings power and erodes profits at insurers that make money by investing premiums in fixed- income products. The renewed threat to interest income comes as banks grapple with dwindling profits from trading services that’s sparked job cuts across the industry.
“People were betting strongly that there would be two or more rate hikes in 2016 and this morning has dampened those hopes,” said Jesse Lubarsky, a financial-stocks trader at Raymond James & Associates Inc. in New York. “The banks need the economy to be improving to achieve the loan growth needed and this may signal that not all is well. These stocks never like additional uncertainty around the Fed – that is what has happened.”
The S&P 500 fell 0.7 percent to 2,091.43 at 11:20 a.m. in New York, erasing a weekly gain that took the index to a seven- month high Thursday. The damage was widespread, with small caps in the Russell 2000 Index sliding 1.1 percent and the Nasdaq Composite Index losing 0.9 percent to snap a seven-day rally.
The selloff was deepest among banks and insurers, with all but 14 of 92 members in the S&P 500 Financials Index retreating. Goldman Sachs Group Inc. and JPMorgan Chase & Co. fell at least 2.7 percent, while brokerages E*Trade Financial Corp. and Charles Schwab Corp. sank more than 6.5 percent.
MetLife Inc. and Prudential Financial Inc. fell more than 3.2 percent. U.S. insurers hold more than $3 trillion in bonds to help back obligations to policyholders. Fixed-income securities account for more than two-thirds of the industry’s investments.
MetLife, the largest U.S. insurer by assets, is among companies that have been shifting the product mix and charging customers more for some guarantees to cushion against low interest rates. Warren Buffett, who built Berkshire Hathaway Inc. by reinvesting premiums from insurance units, said at his annual shareholders meeting on April 30 that low bond yields have hurt the prospects of that strategy for the reinsurance industry.
Real-estate companies provided the only bright spot among financials, as the prospect for lower interest rates bolstered the property sector. Utility shares and phone stocks also advanced, as investors turned to equities that have high rates of dividend payouts relative to their share prices.
A report today showed employers in May added the fewest number of workers in almost six years.Smaller employment gains reduce the odds of a more pronounced upturn in household spending and economic growth after a poor start to the year. Federal Reserve will take into account more judicious hiring, at a time when corporate profits are on a downswing and global markets remain weak, as they consider whether to raise interest rates again.
“A lot of people were looking for a second quarter bounce in GDP after a deceleration in the first quarter and you have to ask if this continues whether we’re going into recession,” said Phil Orlando, who helps oversee $360 billion as chief equity- market strategist at Federated Investors Inc. in New York. “Valuations are already excessive and that’s why the market’s down. This derails the consensus view.”
The disappointing job gains undercut optimism that bolstered the S&P 500’s third-straight monthly increase in May amid speculation the world’s biggest economy could withstand a rate increase as soon as this month. The gauge has reached levels that proved difficult to maintain in previous rallies. It lost momentum after surging 15 percent from a February low to an April 20 peak, before picking up pace in the second half of last month amid improving data.