A two-week bank stock rally ground to a halt Tuesday when an unexpectedly robust consumer price report reignited inflation fears.
The Standard & Poor's bank index fell 0.68% after setting a new high twice in the last two weeks. The Dow Jones industrial average also declined, by 1.01%, and the S&P 500 dipped 0.84%.
The Labor Department reported a stronger-than-expected increase in its consumer price index, excluding food and energy prices. The increase of 0.3% in July surpassed economists' expectations of a 0.2% rise.
It was the rise in lodging costs - a component of the index - that stirred inflation fears in investors, said economist Scott Brown of Raymond James & Associates.
Lodging costs have moved upward since January because lodging companies are attempting to increase revenues by raising prices as opposed to the number of rooms they rent, he said.
Lodging costs rose to 2.3% in July, the biggest increase this year. They were flat in June and declined 0.3 in May.
Mr. Brown suggested investors may be overreacting to the report.
"People don't normally focus on that detail, but the recent trend indicated that lodging prices have really picked up," he said. "Fundamentally the economy has slowed down, and inflation is still under control."
Analysts also discounted the day's activity.
Robert Albertson of Goldman Sachs & Co. said that investors are too focused on interest rates. Rather than selling bank stocks indiscriminately on rate fears, Mr. Albertson argued, they should be investing selectively in those banks that can maintain revenue growth regardless of a downturn in the market.
Revenue growth has been declining for more than a year, which eventually will hurt banks as a sector, he said.
"Everyone is looking at the wake of the boat - and not looking where the boat is going," he said. "The issue is revenues."
Mr. Albertson recommends investment in Banc One Corp., Norwest Corp., NationsBank Corp., and BankAmerica Corp. because of their strong marketing edge, and in CoreStates Financial Corp., Chase Manhattan Corp., and Fleet Financial Group, which offer savings costs through their mergers.
Analyst David Berry of Keefe Bruyette & Woods also thought little of the downdraft in yesterday's market. And he argued that revenue growth for banks appears to be healthy.
Based on a review of the 50 top banks that constitute the Keefe Composite, Mr. Berry said banks may be enjoying double-digit revenue growth.
He said returns on assets and returns on equity grew during the quarter. "In spite of all the things that put us in a panic, banks are still doing really well."
In other news, Keefe upgraded Bank of New York Co. to "buy" from "attractive" based on robust loan growth, and an efficiency ratio that improved by almost 9 basis points within a year. Bank of New York shares fell 12.5 cents to $27.625.
Schroder & Wertheim & Co. downgraded City National Corp. to "perform in line " from "outperform," causing the company to fall 87.5 cents during trading.
City National fell to $17, down $2 from its high on Friday.
