A debate has been raging over the last several months on Wall Street as to whether the financials and the banking sector really needs to do well in order for the overall market to do well. In the past the financials have always been seen as sort of a market barometer and the market is unable to have any kind of sustained advance without the banks and major financials taking part. Some people now believe that this is a modern economy where the stock market will be able to sustain a healthy rally despite the fact that the banking sector will not have things sorted out for quite some time.

This is certainly a question where there is no clear answer as only time will tell, but I would suggest to readers that any long-term sustainable bull market must include the major banks and the financial stocks. These financials are absolutely vital to the health of our overall economy. Sure there can be other sectors doing well while the banks are struggling, but every other sector is going to need to deal with the banking sector at some point. If the banking industry is in the mess that it is in currently, that will hinder other areas that might otherwise be profiting in a much bigger way. For example, while demand for certain products may be strong a company might not be profiting in the way they could be because the credit markets are frozen up and individuals and small businesses are having trouble obtaining loans.

I don’t know that financials and the banking sector have to lead a sustained bull market, but I certainly think they have to be part of that rally. I believe that until we see a more clear picture of what the banking sector is going to do to get its act together, market rallies will be quite short lived. Unfortunately, with no end in sight for the banking system’s problems I am not particularly optimistic that a bull market will be starting anytime soon.