Bank stocks suffered their worst day of the year Monday, amid fears that the Fed may raise interest rates and suspicions that merger speculation may have exceeded reality.
Indexes that track bank and financial service stocks fell by more than 2%, while other market sectors were off by about half as much.
Citicorp fell $5.6875, to $149.50; and Wells Fargo & Co. dropped $12, to $360. Among regionals, Compass Bankshares was off $2.1875, to $46.9375; and Mercantile Bankshares $3.1875, to $36.375. As for thrifts, Astoria Financial declined $2.375, to $56.625; and Washington Mutual $2.9375, to $69.4375.
Brokerages also suffered, with Donaldson, Lufkin & Jenrette off $3.875, to $91.50; and Lehman Brothers down $4.1875, to $69.625.
Financial stocks reacted so sharply because loan demand, bond yields, and profits are sensitive to rate hikes that were hinted at in published reports over the weekend. Minutes of the March meeting of the Federal Open Market Committee showed the central bank is now leaning toward a tightening to cool the economy.
The notion that the economy is hot enough to warrant such attention was fueled Monday by a stronger-than-expected report on existing home sales from the National Association of Realtors.
At the same time, bank investors awoke Monday to word that Mellon Bank Corp.'s board had resoundingly rejected a purchase offer by Bank of New York Corp., taking the bloom off of this spring's uninterrupted spate of friendly merger deals.
Investors were also given pause when Fleet Financial Group, whose shares soared Friday on takeover talk, failed to immediately strike a deal. Shares of the Boston banking company dived $3.5625, to $86.375, on Monday, despite continued talk that First Union Corp., Chase Manhattan Corp., or KeyCorp may be interested.
The Standard & Poor's bank index slid 3.13%, and the S&P 500 dropped 1.93%. The Nasdaq bank index, which includes many thrifts and smaller banks, plummeted 2.70%. The Dow Jones industrial average shed 146.97, or 1.62%, after being off 220 earlier in the day.
Momentum for the selloff, which began slowly late last week when J.P. Morgan Securities warned of an overbought market, crested over the weekend on published, unattributed reports that the Federal Reserve Board was inclined to notch up rates.
Many economists quickly discounted the prospect, saying "real interest"- the rate calculated by subtracting inflation from stated interest rates-has in fact risen because inflation remains so low.
In fact, the Fed could cut interest rates by 50 basis points this year because of reduced inflation and continued concerns about Asian economies, said S. Jay Levy, chairman of the Jerome Levy Economics Institute at Bard College, Mount Kisco, N.Y.
Nonetheless, the days ahead "will be challenging" for bank shares and other stocks, said Thomas Galvin, chief market strategist at Donaldson, Lufkin, Jenrette.
He suggested skittish investors look "selectively for names that can stand on their own," and not necessarily as takeover targets.
Bolder investors shouldn't rule out buying on more merger activity, because the market views consolidation as a way for fast growth and greater cost efficiencies.
Indeed, even though many big banks have already been heard from and struck deals, there is still plenty of action to be had, said Lori Appelbaum, banking analyst at Goldman Sachs & Co.
"Not every bank interested in acquisition is busy integrating another bank right now," Ms. Appelbaum said.
The rout was the first time all year that bank stocks have fallen so dramatically and on such a wholesale basis.
Despite the dramatic setback, some industry watchers do not believe the boom is over for bank stocks. "Shares have risen quite a bit relative to the rest of the market, so we're seeing more of a correction in this sector," said Robert Strand, senior economist at the American Bankers Association.
And the broad market-for all types of equities-remains quite compelling, analysts said.
"Discussions about potential rises in interest rates have unnerved some equity investors, as have concerns about the pace of profit growth," said Abby Joseph Cohen, chief market strategist at Goldman Sachs & Co. "These concerns are largely overdone."
