'Super Contango' Is Gone

By Nicholas Jasinski |  Thursday, May 14 Bank Bounce. An afternoon rally in beaten-down financial shares led the market to a late rebound today. The Dow Jones Industrial Average was down over 400 points shortly after the open this morning, on pace for its fourth straight loss. Investors' recent optimism about a gradual reopening of the economy had been met with new concerns about rising tensions between the U.S. and China and the ability of Congress to reach a compromise on a fiscal support bill. Investors also got a dose of data illustrating the still-deteriorating state of the economy this morning. A total of 2.98 million people in the U.S. filed initial claims for unemployment benefits last week—more than expected and as close to real-time data that's available.  By the afternoon, however, buyers had swooped in to reverse the morning's losses. Financials had a rare day of outperformance,  at least for 2020, leading the market higher. The Dow closed up 1.6%, the S&P 500 added 1.2%, and the Nasdaq Composite rose 0.9%. After a 2.6% gain today, the S&P 500 financials sector is still down 33% this year—ahead of only energy stocks in performance. Rock-bottom interest rates and a gently sloping yield curve hurt banks' bread-and-butter business model: borrow short to lend long. Given the current state of the economy and the long recovery ahead, it's a fair bet to say that rates will remain low for the foreseeable future. And a weak economy means more borrowers unable to pay back their loans. Investors got a preview of that when banks reported their first-quarter results last month, many of which set aside multi-billion-dollar provisions for expected loan losses. Not everyone seems convinced those will be enough to cover consumer, mortgage, and business defaults this year, and analysts have slashed their estimates of banks' earnings. Suspensions of buyback programs—a major contributor to financials' shareholder returns—have also hurt the group. Exchange operators like MarketAxess Holdings or index providers like MSCI have been the only bright spots in the financial sector this year. Their businesses benefit when volatility and trading volume rise, and there has been plenty of that this year. MarketAxess and MSCI stocks are up 33% and 30%, respectively, this year. Banks like Wells Fargo—down 58% in 2020—or consumer lenders like Synchrony Financial—off 56%—are made for different environments. The pressure from the weak economy, low interest rates, and mounting technology costs may spur a wave of consolidation in which small banks sell to larger institutions. Barron's Carleton English took a look at some potential buyers and targets in last weekend's issue.