After declining every day since last Thursday, the stock market finally returned to the upside, though not in particularly dramatic fashion. The Dow gained just 45, though the NASDAQ rallied 1.5% or 25 pts.
Financials were solid, though within that group, the big winners were insurance companies, which had been getting hammered. Hartford Insurance (HIG) was up 17%. Prudential (PRU) was up over 6%, as was MetLife (MET).
Why the volatility in insurance?
David Goldman explains that insurance stocks are basically the canaries in the coalmine — the most levered way to play the financial sector:
Insurance is not only a levered play on credit, but a levered play on the banking system, as the insurers own the bottom of the bank capital structure. If the banks catch a cold, insurers get the flu. If banks get the flu, insurers get pneumonia. And the mechanisms for bailing out insurers are far less clear than those for bailing out the banks.
The high yield rally turned around in a hurry as the market realised what should have been obvious: there is no economic recovery underway. The Markit High Yield Index, the market’s benchmark, fell from 83 to 80 during the past week.
But the run out of insurers suggests a far greater degree of nervousness than underlying asset pricing justifies. Given the administration’s willingness to tinker with credit seniority in the corporate world (Chrysler) as well as mortgages (loan modification) the market’s willingness to hold levered credit portfolios, that is, insurance companies, may be dangerously reduced.