Financial stocks have been out of favor for much of the period since the financial crisis. In the United States, the S&P 500 Financials Index rallied just 9% between the end of 2008 and the end of 2011 even though the S&P 500 soared 50% during the same time period. (The same has been true in Europe as well.)
Investors have been understandably wary of wading back into the group. The financial crisis left some of the world’s largest and oldest financial institutions on the brink of failure. Clearly, many of these institutions failed to control their risk and ended up far too exposed to the U.S. residential propertymarket bust and to the more recent European sovereign debt crisis.
But the tide is starting to turn.
In 2012, the S&P 500 Financials Index was the top-performing sector in the entire market. The Bloomberg European Financials Index soared nearly 26%, compared with a 14.5% gain for the Bloomberg European 500.
The U.S. residential property market is not robust by any stretch of the imagination. But after five years of plummeting home values and soaring foreclosures, prices are showing signs of bottoming out in many markets. Foreclosed homes typically sell at 30% or larger discounts to homes in similar neighborhoods that aren’t distressed. But the shadow inventory of homes — homes still moving through the foreclosureprocess — is beginning to dwindle, putting less pressure on home values. There are even some signs ofspeculation developing in some once-hot markets, such as Miami and Phoenix, as short-term investors buy and sell homes on the cheap to generate a quick profit.
[My colleague Nathan Slaughter agrees. In fact, he’s gone as far as to say that “Now may be the best opportunity in a generation” to buy real estate.]