Fresh concerns about the financial industry swept through markets last week as global stocks ended a five-year bull run, with banks supplanting oil drillers as the biggest drag and sending the Standard & Poor’s 500 Index to its second straight decline.
Even after the biggest rally in two weeks on Friday, the benchmark gauge for American equity slid 0.8% over the five days, extending its February loss to 3.9%. Financial stocks fell to a 2 1/2-year low on Thursday as investors sold their most credit-sensitive assets.
Goldman Sachs Group, Morgan Stanley and Bank of America Corp dropped 5% or more for the week as an index of financial shares in the S&P 500 extended a retreat that has erased more than a quarter of its rally since March 2009. Since the last bull market in American stocks ended in October 2007, banks remain down more than 40% - by far the worst group in the S&P 500.
Concern also increased that central-bank efforts to support growth worldwide are losing potency. The MSCI All-Country World Index tumbled 20% from its May high through Thursday, entering a bear market.
In Europe, Germany’s DAX Index declined 3.4% for the week, while Italy’s FTSE MIB Index lost 4.3% and France’s CAC 40 Index fell 4.9%. Meanwhile, Japan’s Topix index plummeted 13%, its biggest five-day decrease since October 2008.
“We saw signs of panic throughout the week, up until Friday,” said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W Baird, which oversees $110bn. “There’s a big concern that energy sector loan defaults will negatively affect banks, not to mention the possibility of a recession.”
The S&P 500 is 12% below its all-time high set in May, near its lowest level in two years. The Nasdaq Composite Index, which fell 0.6% for the week, is about 17% below its record set in July amid a more than 13% drop so far this year.
The S&P 500’s end-of-week rally marked the fifth Friday in a row that the S&P 500 moved 1.8% or more. Such a stretch of volatility on the last day of the week hadn’t occurred since the Great Depression.
Declines in banks set the tone in the market’s latest rout. A gauge of financial shares in the S&P 500 has slumped more than 14% this year, ending Thursday at its lowest level since 2013. The group surged 4% on Friday, the most in almost five years, as JPMorgan Chase & Co’s Jamie Dimon repurchased stock and a major German lender’s profit topped estimates.
The earnings beat from Commerzbank provided a respite from a reporting season full of disappointment from financial firms, after Prudential Financial and American International Group both fell short of analyst estimates this week. Other industries in the S&P 500 have shown similar futility in boosting the benchmark index, even though more than three-quarters of companies that have reported so far have beaten profit forecasts. During a two-day testimony that concluded on Thursday, Federal Reserve Chair Janet Yellen sounded dovish, but that wasn’t enough to halt a five-day selloff. She told Congress that declines in equities and other markets may weigh on the outlook for the economy - an assertion traders initially welcomed before erasing gains.
“Central bank activities don’t seem to have helped the global economy, nor the US, so markets aren’t reacting as much to them,” said Bittles. “The expectation that we might see a more gradual pace of rate hikes was already built into the market.”
Yellen’s comments reflected a concern that has hung over equity markets all year: whether the evaporation of wealth in share prices could bleed into the economy, sour consumer confidence and restrain spending. Almost $3tn of equity value has been erased as declines in the S&P 500 swelled to as much as 11% this year.
With stock prices plummeting amid stagnating profit growth, the S&P 500’s forward 12-month price-to-earnings ratio has decreased 11% since the start of the year, falling from 17.4 times to 15.5, data compiled by Bloomberg show. The measure is now below its historical average of 16.6 times.
Still, the gauge remains more expensive than developed markets in Europe, where the Stoxx Europe 600 Index trades at 13.9 times estimated earnings.
A measure of investor anxiety reflects recent declines in US stocks. The Chicago Board Options Exchange Volatility Index climbed 8.6% for the five days, bringing its two-week increase to 26%. The so-called fear gauge surged 11% on Monday, its biggest single-day gain in more than two weeks.
Even with attention shifting to financial stocks, investors continued to sell energy shares.
An index of energy companies in the S&P 500 declined 0.8% as the price of crude oil fell 5.9%. Chesapeake Energy Corp plunged 48% over the five-day period after a report that it hired restructuring attorneys.
“The slide in crude oil is doing one concrete thing for investors: creating fear,” said Rob Lutts, president of Massachusetts-based Cabot Wealth Management. “Nobody knows the bottom price of oil. It’s been a rollercoaster ride in the market, driven by tremendous uncertainty.”


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