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Financials Defy ‘New World’ With January Jump: Chart of the Day

U.S. financial stocks are hardly a bargain as they wrap up their best start to a year since the 1990s, according to Brian Belski, Oppenheimer & Co.’s chief investment strategist.

The CHART OF THE DAY shows how the Standard & Poor’s 500 Financials Index has done in each January since 1997, the last time that the industry gauge beat this month’s 7.5 percent gain through yesterday.

“Longer-term investors should not be fooled by what appear to be attractive valuations for financials,” Belski wrote in a Jan. 27 report. Anyone looking ahead three to five years ought to invest less money in these stocks than their S&P 500 weight would suggest, he added. They account for about 14 percent of the index’s value.

The financial index was valued at 12.4 times earnings yesterday. The ratio was about twice as high two years ago, according to data compiled by Bloomberg.

“Most of these companies operate in a ‘whole new world’ of increased scrutiny and regulation,” wrote Belski, based in New York. He added that more restrictive capital requirements, imposed as part of that shift, will hurt profitability.

This month’s gains in the shares resulted largely from buying to capitalize on a rising stock market, he wrote. S&P’s industry indicator swung by an average of 1.4 percent for every 1 percent move in the S&P 500 during the past 12 months, based on Bloomberg’s data. This reading, known as beta, was higher for financials than for any of the index’s nine other main industry groups.

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