Bank Stocks Slide Amid Electoral Uncertainty

Financial stocks slid Wednesday as investors worried about who will be president, and whether a Bush presidency would bring a fiscally imprudent tax cut.

This nation is still waiting for word on whether a Democrat or Republican will take charge of the White House, though the likely winner is believed to be George W. Bush. In the meantime, the market was mulling over the narrow margin with which the Republicans maintained control of Congress and the possible policy gridlock that may result in the months ahead.

"The major theme is uncertainty. People are leaning to the sell side," says Patrick Boyle, head financial trader at Credit Suisse First Boston. He also points out that financials have been performing well and were considered a safe haven in recent weeks, adding that many investors saw today's uncertain environment as a chance to takes some profits.

The Philadelphia Stock Exchange/KBW Banks Index was slipping 2.1%, while the American Stock Exchange Broker Dealer Index was down 3.1%.

Also infusing some ambiguity into the sector is the fact that many committees will have new chairmen next year. "The most amazaing thing is that the head of the Senate Finance Committee has been defeated," said John Babyak, portfolio manager at WHB/Wolverine Asset Management in Stamford, Conn., referring to Sen. William Roth's (R., Del.) defeat. Babyak's firm counts a number of financial stocks among its top holdings.

Babyak points out, though, that a Bush tax cut could push interest rates up. Higher interest rates are problematic for financial institutions since it raises the cost of borrowing money. "The weakness in banks today is probably tied to the outlook for rates," said Babyak.

Chip Dickson, banks analyst at Lehman Brothers, says the makeup of the government is worth watching. "It takes Congress and the executive branch to pull things together," he says. Without making predictions about policy, Dickson says he will keep an eye on any new regulations for financial businesses, as well as on who joins the Federal Reserve board.