Nowhere was the housing market collapse and financial meltdown of 2008 more acutely reflected than in the 75% drop of the financial sector, or financials, made up largely of bank and insurance company stocks. Not surprisingly, over time the Fed’s massive monetary stimulus helped stabilize markets generally, including the hard hit financials, which have managed to come back about half way – in contrast to most other sectors which have done much better. That may in part reflect the unintended consequence of narrowing maturity yield spreads (difference between long- and short-term yields) in the new low interest rate environment negatively impacting financial intermediaries.
The lower interest receivables from their assets relative to expenditures on their liabilities that financial intermediaries are now facing, given the generally longer maturity of their assets than liabilities, represents a serious headwind for financials. When added to the technology driven financial disintermediation currently also happening financials look increasingly challenged going forward. (See our previous feature – Is Obsolescence Priced In).
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