Bank stocks continued their weeklong tumble Thursday, hurt by robust economic data that fanned fears of a rate hike.
Investors appeared to be spooked by a striking revision of January's retail sales report, which put sales growth at 1.5% rather than the 0.6% originally reported.
The numbers prompted a report, titled "Good Golly, Miss Molly, the Consumer's on a Roll," by Joseph Liro, an economist at CIBC Wood Gundy, in which he predicted the Federal Reserve would raise interest rates in May.
Adding to the perception of an acceleration in the economy, weekly jobless claims hit a seven-year low. They fell 5,000 to the lowest four- week moving average since May 1989; economists had expected claims to rise by 5,000.
Bond prices fell on the news, and bank stocks plunged with them.
Citicorp shares dropped $5.50, to $117.25, about 7% below the stock's 52-week high of $127.125; BankAmerica Corp. lost $4.25, to $114.25, off 7.6% from its high. NationsBank Corp. lost $3, to $59.75, off 8% from its 52-week high.
The S&P Bank Index slipped 3.5%, about twice the percentage decline in the Dow Jones industrial average.
"People are probably taking another look at the level of financial services in their portfolio," said analyst Bradley Ball of CS First Boston.
Blaine Rollins, a portfolio manager at Janus Funds, said the stocks were due for a breather. "Now that they've doubled their market performance, it's healthy" for them to give back some of their gains, he said.
Mr. Ball said he remains bullish on the sector and expects banks' price- to-earnings ratios to appreciate.
Though people fear that a rate hike would hurt loan growth and credit quality in the near term, "the impact won't be as significant as it might have been 10 years ago," Mr. Ball said.
Analyst Judah Kraushaar of Merrill Lynch & Co. said bank stocks are trading at a higher-than-usual multiple of annual earnings so that investor worries about rates, which had subsided, are coming to the fore again.
Mr. Kraushaar said banks may be approaching their peak but some opportunity may persist in the sector.
"The typical bank stock in our universe still can provide about a 13%- 15% annualized return on investment, 1%-3% above the median cost of equity. Bank stocks are about 10% away from the point that would make us materially more cautious," Mr. Kraushaar wrote in a report this month.
Shares of Chase Manhattan Corp. dropped $5, to $98.87, despite being upgraded to "buy" from "neutral" by Lawrence Vitale of Bear, Stearns & Co.
Mr. Kraushaar also recommends the stock, saying he expects it to produce a 19% return on equity in 1997-1998, with an annualized total return of 29.5%. His price target for Chase is $158.
