Investors have drained almost $26 billion in market capitalization from J.P. Morgan Chase & Co. (JPM) since the bank announced a surprise $2 billion trading loss a week ago--and most of it likely has left the bank sector altogether.
E. Keith Wirtz, the president and chief investment officer of Fifth Third Asset Management, said the money leaving banks is "is either going away from stocks, or they are going into categories like staples, utilities, health care, those more defensive sectors." Utilities and health-care stocks are roughly flat over the last five trading days, and consumer discretionary fell considerably less than financials. Biotechnology stocks are up.
Bank stocks have struggled to find a firm footing after the financial meltdown. But the sector has been among the best performing this year. J.P. Morgan was part of the rally, in part because it was among the first to restore its dividend, with an increase last year and another one earlier this year.
Its "premature" dividend hike "added fuel to the fire" of financial stocks, wrote Andrew Wilkinson, the chief economic strategist of Miller Tabak & Co. LLC, in a research note Thursday. "Financials outperformed discretionary stocks by 7% during the rally. All that has been given back as the rally turned to dust."
J.P. Morgan, along with Wells Fargo & Co. (WFC) and U.S. Bancorp (USB), has long been the go-to stock for fund managers who want to invest comfortably in bank stocks.
All three had come through the financial crisis in strong shape, their risk management held, their top executives are well regarded, and their growth prospects are promising.
But shares of Wells Fargo and U.S. Bancorp, though not down nearly as much, seemed to absorb little of the money that left with the more than 15% decline of J.P. Morgan's stock. Shares closed at $33.93 Thursday, off 4.31% or $1.53. Shares are down $6.81 in five days.
Investors put their money elsewhere rather than buying shares in another bank, no matter how stable the bank appears.
The lack of investor interest in shifting funds from J.P. Morgan to Wells Fargo and U.S. Bancorp is in part because most bank stock investors own those stocks already.
"They own all three. J.P. Morgan, Wells Fargo, U.S. Bancorp, those are the three big pillars" of the banking industry, said Byron Brand Snider, president pf West Oak Capital LLC, a J.P. Morgan shareholder. And "when you take a step beyond those names, then you have worries about balance sheets that aren't as big and strong.
"If I were to lose confidence in owning a name like J.P. Morgan, it probably would be money flowing out of the sector," he said. He has held on to his J.P. Morgan shares.
But other investors, particularly generalist fund managers selling J.P. Morgan "are pulling their money out" of the banking sector, said Brian Bertonazzi, the head of sales and trading at Sandler O'Neill + Partners LP. Thomas Michaud, the chief executive of KBW Inc., an investment bank specializing on the financial services industry, said, "Investors see what happens...and move on."
J.P. Morgan's reputation took a massive hit when the bank disclosed that it lost about $2 billion already this quarter on trades to hedge the bank's credit risk. The full extent of the damage from the flawed hedging strategy won't be known until the trades are unwound, which could take until the end of the year, Chief Executive James Dimon told investors last week.
Michaud said J.P. Morgan's issues shouldn't tarnish the entire industry, but they do in part because J.P. Morgan is such a big part of major bank indexes and the big drop is pulling down the sector's perceived performance, regardless of how risky the individual banks are.
That adds to concerns that banks in general are too leveraged and, given the slow economic recovery and uncertainty about how regulatory changes will impact banks' profitability, overall not a good investment.
Still, some analysts and investors believe sellers of J.P. Morgan stock are overreacting. Jill Cuniff, the president of Edge Asset Management, said her firm underweights banks, particularly the large banks.
"We don't own Citigroup (C), we don't own Bank of America (BAC), we are not confident in their business models," she said. Wells Fargo and J.P. Morgan, however, were exceptions, and "we still feel confident" in J.P. Morgan.
For Wirtz, the J.P. Morgan dip is "presenting a buying opportunity.
"My worry is that J.P. Morgan overreacts and overcompensate on risk control," he said. "They need to take risk; I want them to earn money."
-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; firstname.lastname@example.org