10 Years After: A Changed World for Financials?
An anniversary is often a time to reflect. The 10th year after the Lehman failure is certainly one of those occasions. While many view the September 2008 collapse of Lehman Brothers as the onset of the global financial crisis, signs of trouble appeared much earlier. Financial stocks were already starting to slide as early as February 2007, and the market peaked in October of that year. So, while we are observing the “official” anniversary of Lehman’s demise this month, clearly things had begun to unravel well before. On the occasion of the anniversary, we took a look at what has changed for the Financials sector and what has not. Our paper can be found here. Below are a few of the highlights.
While the fall of 2008 was not a good time for equities in general, Financial stocks were the standard bearers of the decline, lagging the Russell 1000 by almost 12% from early 2007 to the end of August 2008. And they have continued to sharply underperform. Over the last 10 years, while Financial stocks have roughly doubled, the Russell 1000 has almost tripled (Figure 1).
Total risk of the sector climbed to more than two times that of the Russell 1000 during the crisis, and as of August 2008 the sector had by far the highest risk of any of the 11 GICS sectors that comprise the Russell 1000. Total risk had settled back down by 2011, but surged again (relative to the market) in 2016 through 2017, before ebbing once again this year. Risk in the other 10 sectors has reestablished itself in the middle of the pack, and overall risk compared with the market currently looks much calmer.
Financials’ representation in the Russell 1000 remains lower than it was pre-crisis, but the sector’s contribution to risk is no longer higher than what would be expected given its weight. From this perspective risk is “back to normal” as well.
Financials’ exposures to Axioma’s style factors varied substantially over the past 10 years. Most notable, perhaps, was the big hit to Earnings Yield, as earnings fell even more than stock prices, driving Earnings Yield down (and to a negative reading) for a short period before slowly recovering, but not quite to pre-crisis levels.
We also took advantage of Axioma’s recently released factor library to look at how sensitivity to various interest-rate-related variables has changed. We see that Financials as a whole have become more positively sensitive to widening US term spreads (net of the market), but increasingly likely to be hurt by wider credit spreads, especially in the last year or so.
The 10-year anniversary of the collapse of Lehman Brothers inevitably triggers reflection, even though the seeds of the global financial crisis had been sown well before that infamous day. Financial companies were the symbols—and many would argue, the cause—of the crisis, and a number of the variables we use to assess risk in markets and portfolios reflected the attribution to those companies. Most notably, the sector has underperformed the market substantially. Total risk relative to the market has settled down, and Financials are no longer the riskiest sector.
However, Financials continue to lag the overall market, even this year. Despite a recovery in most of the measures of risk we examined, until we see that performance stabilize, we will not believe that Financial stocks are back to normal.