On Wednesday, the Dow Jones Industrials (^DJI 0.13%) stayed in the malaise that has plagued the market all week, as investors ponder whether a sixth-straight year of bull-market gains will be in the cards for 2014 and early 2015. As of 12:30 p.m. EDT, the index was down 31 points, but most financial stocks among the Dow 30 were falling more sharply. JPMorgan Chase (JPM 0.20%) and American Express (AXP 0.34%) led the way down among the Dow's financials with losses of about three-quarters of a percent, ranking them among the worst performers in the entire Dow.
In one way, high-profile financial stocks are partially a victim of their own success. For JPMorgan Chase, Goldman Sachs (GS 0.16%), and other Wall Street banks, the strong performance in the financial markets has caused compensation costs to rise, with Wall Street's payouts of bonuses for 2013 reaching their highest level since 2008, according to the comptroller of the state of New York. At $26.7 billion in aggregate, bonuses equated to an average payout of $164,530, the third best year in history. Compensation pressure is a constant struggle for financial firms, as even when profits are under threat from billion-dollar legal settlements and other regulatory issues, top-notch talent demands top-scale pay in order to avoid jumping ship and taking their skills to a competing company. As a result, even when times are good in the markets, Goldman, JPMorgan, and other financials can struggle to keep overhead down and profits up.
The other challenge that financials face is the growing concern that many companies have already seen their best days during the recovery. Card giant American Express dug itself out from under potentially huge credit-related losses created during the market meltdown, and it has emphasized initiatives to try to broaden its customer base. Targeting customers who it might have refused to serve in the not-too-distant past, AmEx is working hard to try to grow, yet some worry that it might also be watering down its brand in the effort to broaden its appeal.
Similarly, insurance giant Travelers' (TRV 0.39%) valuation looks incredibly attractive for investors. Yet the fear is that after a near-perfect year that had very few catastrophic loss events, Travelers has nowhere to go but down once more normal weather patterns assert themselves. That concern over what seems like an inevitable setback for the company could hold back its shares even if this year's loss experience is relatively benign as well.
Financials must play a role in the Dow's success if the index is to continue advancing. As doubts begin to emerge within the financial stocks of the Dow, investors could see more resistance for the average as a whole to keep climbing to new record highs.