Bank stocks, financial ETFs struggle as Morgan Stanley shares see biggest drop since 2020

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Exchange-traded funds that buy stocks in the financial sector struggled Wednesday, with Morgan Stanley’s steep drop landing it among the S&P 500’s worst performers.

Shares of the Financial Select Sector SPDR Fund
XLF,
which tracks financial companies in the S&P 500 index, closed 1.7% lower on Wednesday, according to FactSet data. Morgan Stanley’s stock finished the session with a 6.8% slide, after the bank reported a fall in third-quarter profit, although the results beat analysts’ expectations.

Financial stocks lagged the broader S&P 500 index on Wednesday, as other Wall Street banks such as Goldman Sachs Group Inc.
GS,
-0.92%
and Citigroup Inc.
C,
-1.01%
also saw sharp declines. The S&P 500
SPX
finished Wednesday down 1.3%.

The financial sector has posted losses so far this year, in contrast to the S&P 500’s gain of more than 12%. Bank-focused ETFs were hammered earlier this year after regional banks collapsed and investors worried that the rise in Treasury yields was creating cracks in the financial system.

The SPDR S&P Regional Banking ETF
KRE
has plummeted around 30% in 2023, including a sharp 2.7% decline on Wednesday. The Invesco KBW Bank ETF
KBWB,
which tracks the broad banking industry, fell 2.6% on Wednesday in its worst day since Aug. 22, bringing the fund’s plunge this year to 24%, FactSet data show.

Morgan Stanley
MS,
-2.62%
booked its largest daily percentage drop since June 11, 2020, when it tumbled around 8.5%, according to Dow Jones Market Data.

Meanwhile, the S&P 500’s financial sector
XX:SP500.40
is down 3.3% this year through Wednesday. 

In the bond market, long-term Treasury yields continued to climb on Wednesday, with the 10-year rate
BX:TMUBMUSD10Y
rising 5.6 basis points to 4.902% to reach its highest level since July 25, 2007 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data.

Read: Why bank stocks are the ‘Achilles’ heel’ of markets as bears worry high bond yields may ‘break’ something

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