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The Big Bright Spot in Friday's Stock Market Rout

By Dan Caplinger – Sep 4, 2020 at 11:59AM

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An attempt at a recovery in the morning proved short-lived.

The quick reversal in the stock market's momentum continued to gain steam on Friday morning, as major market benchmarks added to losses from Thursday's big downward move. Market participants seem to have a newfound appreciation for just how impressive the gains from the March lows have been. That's motivating many investors to take profits while stocks remain relatively close to their recent record highs.

Just before 11 a.m. EDT today, the Dow Jones Industrial Average (^DJI 1.88%) was down 460 points to 27,833. The S&P 500 (^GSPC 1.97%) had lost another 88 points to 3,367, and the Nasdaq Composite (^IXIC 0.00%) was again the big loser of the group, falling 535 points to 10,923.

Thursday's declines were centered on the tech stocks that have driven so much of the recent rally, and Friday morning's moves weren't any different. Interestingly, one part of the market not only went unscathed by the latest downward move but actually gained ground. Below, we'll look at why financial stocks are doing well and whether they can keep outperforming even if the broader market continues to correct lower.

Cement entryway to building, with word Bank engraved on arch.

Image source: Getty Images.

Betting big on banks

Investors in financial stocks were pleased to see their holdings provide some ballast against losses in hard-hit areas like technology. The Financial Select Sector SPDR (XLF 1.97%) didn't exactly light up the leaderboard, but even modest gains shortly before 11 a.m. EDT were enough to make it the best-performing sector in the market.

Banks did even better. Among top companies, JPMorgan Chase (JPM 2.02%) and Bank of America (BAC 1.64%) were each up more than 1% on the day, while Citigroup (C 1.90%) almost reached a 1% rise. Credit-card issuing institutions like Discover Financial (DFS 2.83%) and Capital One Financial (COF 3.99%) did even better, climbing between 3% and 4% early Friday. American Express (AXP 2.23%) managed a better than 1% gain as well.

Why financials are in a solid position to weather a market downturn

Financial stocks took a lot of damage during the bear market in February and March, which was surprising at the time because of their reputation for being relatively defensive plays. Even before the COVID-19 pandemic hit, bank valuations were extremely reasonable. But even value investors were concerned that a flattening yield curve and generally low interest rates overall could hurt the banks' ability to sustain and grow profits.

With high-flying tech stocks finally seeing a correction, investors seem to be looking for more of a value approach. Financials fit that mold quite nicely right now, with earnings multiples generally in the low teens. Moreover, unlike other beaten-down sectors like the airline industry, banks aren't suffering from the monumental threat of permanent disruptions to their core business models.

Admittedly, banks aren't free of risk. Friday's numbers on employment were somewhat encouraging, but unemployment levels remain at stubbornly high levels. If that leads to a full-blown economic recession, then recent rises in default rates could continue. That in turn could pressure bank profits, forcing investors to reevaluate their prospects.

For now, though, investors are looking for any safe port as the market-correction storm rages on. Financials are benefiting from that sentiment on Friday, and they could continue to do well if investor aversion to high-growth winners continues to build.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
$31.07 (1.64%) $0.50
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$107.99 (2.02%) $2.14
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,683.74 (1.88%) $548.75
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,719.04 (1.97%) $71.75
Citigroup Inc. Stock Quote
Citigroup Inc.
$43.40 (1.90%) $0.81
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,829.50 (0.00%) $0.00
American Express Company Stock Quote
American Express Company
$140.56 (2.23%) $3.07
Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
$95.04 (3.99%) $3.65
Discover Financial Services Stock Quote
Discover Financial Services
$93.58 (2.83%) $2.58
The Select Sector SPDR Trust - The Financial Select Sector SPDR Fund Stock Quote
The Select Sector SPDR Trust - The Financial Select Sector SPDR Fund
$31.03 (1.97%) $0.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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