Despite a year plagued by lawsuits and fretting over the cost of regulation, financial firms have performed solidly in the stock market during 2012. In fact, the sector as a whole has rebounded from being the worst industry to invest in during the past few years, to the best, posting remarkable gains. While the stocks remain far from their all time highs, we see solid growth in the past twelve months.
After falling 18 percent in 2011, financial stocks are on track for their largest gain in nine years, up nearly 26 percent. Meredith Whitney, CEO of Meredith Whitney Advisory Group has observed that firms like Citigroup (NYSE: C) and Bank of America (NYSE: BAC) are displaying a combination of clarity, and fundamentals in their business models, which investors are finding attractive.
Bank of America, the Charlotte based banking giant led by CEO Brian Moynihan is even the top gainer in the Dow Jones Industrial Average, with a stock price up more than 100 percent in 2012. The bank had been the biggest decliner last year, and has struggled to find it’s way while integrating Merrill Lynch and Countrywide into the broader firm. As a sector, financials are the best performers in the Standard & Poor 500, outperforming the broader index for the first time since 2006. The magnitude of the gains is significant, as the last time the sector outperformed the market by more than 10 percent was back in 2000.
JPMorgan Chase (NYSE: JPM), plagued by the London Whale debacle earlier this year is up 31%, while Goldman Sachs (NYSE: GS), also suffering from public relations disasters is up 40%. The rise is even touching American International Group (NYSE: AIG), a firm who prior to 2008 few outside financial markets even knew of, but became the poster child for failure following the financial crisis – their stock is up 51% this year.
While the significant gains during the year are welcome, there are potential potholes in the near future – the fiscal cliff could have a particularly pronounced impact on financial service firms, and the continued low interest rate environment make it difficult to make money on lending and spread based products. The industry still has a long way to go before restoring consumer and investor confidence, and the path ahead to be compliant with the new world of regulation will surely be difficult. But, if 2012 is a part of a broader trend, the firms may finally return to the safe haven investments they proved to be for investors for much of the past decade prior to 2008.
