Do the Financials Even Matter Anymore?

This afternoon’s mass downgrade of the financials by Standard & Poor’s caused a small dip after-hours in $ES_F $XLF etc. However, it was certainly nothing to get too excited about – Have the financials lost much of their importance in terms of the broader US equity market? And can the major US equity indices ($COMPQ, $IWM, $SPY) move higher while the financials are stuck in neutral or even in reverse?

The largest financial by market capitalization ($WFC) is not even among the top 10 market cap stocks in the S&P 500. Moreover, the financials now only constitute 13.6% of the S&P 500 and there is a strong trend of financials losing more and more weighting relative to the rest of the sectors in the S&P 500:

 

 

Above graphics from S&P 

Financials have significantly underperformed (7%+) the S&P 500 since the early August market plunge:

Notice that the SPY/XLF ratio peaked at the end of the 2008-2009 financial crisis followed by a roughly 18-month basing period – The ratio gradually moved higher beginning in February 2011 before breaking out in early August:

 

A secular shift has taken place since 2007, perhaps we are on the cusp of the next leg higher in this ratio which will easily surpass the 2009 high:

 

There is a laundry list of reasons which help to explain why the financials continue to underperform, ranging from balance sheet de-leveraging to increased government regulation – I believe that this trend will continue. I will even go out on a limb and state that US equities can continue to hold up and even rally higher while the financials languish.

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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