An earlier post argued that damage to US financial institutions from the subprime crisis could be similar in scale to the losses suffered as a result of the savings and loan crisis of the late 1980s. If so, the fall in financial stocks in 1989-90 could be a guide to the extent of the current bear market.

At the time of the last post the comparison suggested the bear market would extend in both price and time but a bottom might be in place by March, to be followed by a strong rally over the remainder of the year. The chart below provides an update. Financial stocks would have to fall by a further 10% to match the cumulative decline during the S&L bear market but are now in the time window for a low.

Bears argue that valuations are not yet as depressed as at the October 1990 trough. For example, the price to book ratio of the financials index is 1.46 versus 1.02 then. Relative to other sectors, however, the position is more extreme now: the price to book discount to non-financials is 52% versus 45% at the 1990 low.

Another bear argument is that loan delinquencies will rise further but that was also true when the October 1990 rally began: delinquencies peaked in the second half of 1991, by which time financial stocks had rallied by more than 60%.

The real level of the Fed funds rate is lower now than at the 1990 trough, while the Treasury yield curve is steeper. Credit spreads are still widening but they were at the time of the 1990 rally too, peaking only three months later.

Perhaps subprime losses will exceed S&L damage. If not, financials are starting to look attractive, particularly relative to other sectors.