The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- In 2011, U.S. financial stocks collectively posted the worst performance of the 10 major economic segments. Not only did the
SPDR Select Sector Financial Fund
decline 17%, but the
P/E ratio for the sector contracted 22%
In 2012, the skies have been a little brighter for banks, insurers and property developers. The
S&P 500 SPDR Trust
has rallied for nearly 4.8%, but the SPDR Select Sector Financial Fund has posted a blistering 9.0%.
Are the super-sized percentage gains a function of recent earnings reports? Probably not.
JP Morgan Chase
experienced weaker-than-anticipated revenue,
profits plunged 56% and
badly missed earnings-per-share expectations.
and become a fan on
Then, are stock prices of financial corporations simply riding an audacious wave of hope? Perhaps.
Bank of America
did beat ridiculously low estimates with a fourth-quarter profit of 15 cents per share. And fears of its survival appear to have dissipated.
However, the hope for the financial sector may be tied to a different potentiality. Investors may be "banking" on a Mitt Romney presidency.
Obviously, Gingrich isn't going to make a Romney nomination easy. And even if Mitt manages to win the Republican slot, Obama doesn't appear likely to fade into obscurity. In fact, the wildly popular prediction site, InTrade.com, currently shows a 56% likelihood that Obama will win re-election.
That said, the U.S. economic recovery is tenuous. Most economists believe Europe will survive its current debt crisis, but struggle to stay out of recession in 2012. High oil prices may also drag on the U.S economy. In brief, a Romney presidency may be a whole lot more probable as the year plays out.
Of course, the stock market is a forward-looking creature. Since it is unlikely that banks will be lending a whole lot more in 2012, and since current regulations are brutalizing the investment giants like Goldman Sachs, it seems that financials are factoring in something (or someone) else.
In truth, I'm not the only one who has been thinking that Mitt may have something to do with it. Analysts at FBR Capital Markets Corp. expect Goldman Sachs and JPMorgan Chase to rocket by mid-summer, as economic realities begin weighing down incumbent politicians. Keep in mind, Romney vows to repeal the 2010 Frank-Dodd regulatory law and that a Romney regulatory team would be far friendlier to big banks.
One might also consider the price action of XLF. When Romney won New Hampshire, XLF vaulted 1.2% the following day. In the two trading days since Gingrich won in South Carolina, XLF has gone nowhere ... not necessarily because Gingrich won, but because the Republican nominee may not be known until the summertime.
I still wouldn't recommend investing in bank ETFs at this time. European debt woes still weigh on banks and the macroeconomic picture remains blurry.
The safer way to get exposure to financial companies is through their preferred shares. Yet even
iShares S&P Preferred
appears overbought with its RSI reading well above 70. If you're going to make a foray, wait for a pullback.
Disclosure Statement: ETF Expert is a Web site that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.