Yet some investors say such terrifying conditions are a great time to start buying stock in the financial sector.
Their argument: Financial stocks in the S&P 500 have tumbled almost 10% in the last six months, while the broader index is up 2.75%. Financial giants like Citigroup (C), Bank of America (BAC), Wachovia (WB), Merrill Lynch (MER), and big insurer AIG (AIG) are all trading at or just above one- and, in some cases, two-year lows.
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For long-term investors, the beat-up financial sector may be the best place to look for bargains. The shares of some regional banks, in particular, are at levels that basically price in a "worst-case scenario" of a recession, says William Fitzpatrick, an equity analyst at Johnson Asset Management. Many banks are paying big dividends of 7% or 8%. On "any sort of recovery at all, these stocks are really going to rally," he says.
But Fitzpatrick and other expert investors warn that financial stocks are at low prices for very good reasons. Things really could go from bad to even worse.
Any title that implies financial stocks are in some way attractive right now is simply put really damn stupid. There are three years of resets ahead as the chart from the IMF below indicates. Calculated Risk has been posting on the declining ABS/CMBS indexes. Home prices are still dropping. Short version, the credit crunch is just starting and won't let up for some time.
