After sailing ahead for so long, major banks' stocks hit heavy weather recently. Smaller banks, which had trailed in their wake, have fared considerably better.
The Nasdaq market, home to most smaller banks' stocks, offers a clear picture. Nasdaq banks' issues have slipped 3.5% since that market peaked in mid-February, while the Standard & Poor's bank index, dominated by the larger industry players, has fallen 10.8%.
Indeed, big banks have been clobbered during the recent shift in investor psychology in the wake of the Federal Reserve's March 25 decision to rein in the economy by increasing short-term interest rates.
The overall market has held up better than banks. The S&P 500 has slipped 6.6% from its high, and the much-watched Dow Jones industrial average is down similarly.
The relative strength of smaller banks is all the more striking in light of the steep selloff in other sectors of the Nasdaq market, which is dominated by technology and other high-growth companies. The Nasdaq composite index is more than 12% below its peak, and well below its yearend level.
"The big stocks are where the herd is," said industry analyst Thomas Maier of Everen Securities, Chicago. "The small-bank stocks never participated as much in the rally as much as the large banks."
Mr. Maier has been recommending small banks.
Analysts are quick to say that Nasdaq banks have fared better than others because of the lack of "momentum investors"-the players who search out hot market sectors, but who also intensify the high and lows of stocks that attract their attention.
"Given the share repurchasing and restructuring in this group, financials have had a lot of momentum appeal," said bank analyst Claire M. Percarpio of Janney Montgomery Scott Inc., Philadelphia. "Momentum investors have been in the big names, so there has been more movement."
Market technical analyst Philip Rettew of Merrill Lynch & Co., New York, pointed to the psychological incentive to own stock in small banks. He added that their sheer abundance has held investors, who expect takeover speculation to eventually boost their stocks.
"There are too many four-letter bank stocks," Mr. Rettew said, referring to the Nasdaq ticker symbols. "They hold value because the assumption is that in a world of downsizing you don't need 14 billion banks, and there will be takeovers and amalgamations."
And what of the big banks?
For them, the tumult over interest rates came at a vulnerable moment. Analysts say investors are typically skittish this late in the quarter, since companies provide little guidance in the quiet period before earnings reports begin flowing.
"Investors are going to be edgy until we get some real information and see that things look pretty good after all," Mr. Maier said. "As the quarter progresses, and less real information is being made public, there is increased uncertainty, and investors get a little bit flaky."
Despite the big drops in the big banks' shares, industry watchers are expecting things to start looking up soon for the bank stocks as the impact of the Fed's quarter-point increase in the Federal funds rate fades.
"There's been a little overreaction here," Ms. Percarpio said. "The fundamentals of the industry are very strong, and I don't know that another 25 basis points is going to have a noticeable effect on the earnings power of the industry."
