Investors should be brave, not give up on bank stocks

It’s no surprise energy stocks are in a world of hurt — that’s what happens when oil is this cheap. But seeing bank stocks fall apart is the latest chapter in the unfolding sell-off, and a much scarier one.

The Financial Select Sector SPDR Trust, an exchange-traded fund that tracks the performance of the financial stocks in the Standard & Poor’s 500, is down 19% over the past year, says S&P Global Market Intelligence, very nearly falling into a 20% bear market. The average financial stock in the S&P 500 is now down 17% — just this year.

Trouble in the sector is a big worry since financials account for 15% of the value of the S&P 500, compared with just 6.6% for energy, says S&P Global.

Bank investors suddenly have lots to worry about. Financial upheaval in Europe, including negative interest rates in many countries, plus rising financial distress in the U.S. is a big concern. The default rate on lowestrated debt worldwide is expected to hit 4.2% in a year. That’s double the 2% rate in 2015, says Moody’s Investors Service. Big European banks like Societe Generale are sounding warnings, leading to their shares falling more than 20% in the past year.

But it’s not just an overseas problem. Defaults in the commodity sector are starting to get real — real fast. The U.S. “distress ratio,” which measures how much risk the market anticipates from bonds, entered 2016 at its highest level since the middle of 2009 during the throes of the financial crisis, says Standard & Poor’s.

On Friday, in an effort to quiet doubts about its health, German lender Deutsche Bank said it would buy back $5.4 billion in debt — sending the battered stock soaring. And in New York, JPMorgan investors cheered news that CEO Jamie Dimon purchased 500,000 shares, worth $26.6 million, in a show of support for his company, which has suffered a 20% drop in the stock this year.

Meanwhile, analysts are forecasting financial sector profits to recover, rising 5.4% in the current quarter and 5.7% in 2016, says S&P Global. Analysts, too, think that the average financial stock will be 31% higher in 18 months than it is now.

Just don’t bank on a smooth ride getting there.