Bank stocks have a long history of fading in the second half, and last year was no exception. Will 1995 be different?
Yes and no. Analysts see no particular reason why banks should head south, as they did last September amid rising interest rates. But few think bank stocks can come close to the first half's barn-burning pace, even though rates are now flat or falling.
"These stocks aren't going to give anything back, but their valuations also won't keep running as far ahead of earnings growth as we have recently seen," said Katrina Blecher of Gruntal & Co., New York.
This summer, analysts have downgraded numerous bank stocks as fully priced. "We have taken 11 stocks off the list since May, and 10 were for price reasons," say R. Jay Tejera of Dain Bosworth Inc.
The consensus view is that this summer's outbreak of mergers and acquisitions, coupled with the boost to earnings from falling deposit insurance premiums, will keep the stocks moving forward.
Still, some industry fundamentals are "clearly softening," said Mr. Tejera. That may keep the stocks' performance subdued, as has happened so many times in the latter months of the year.
In the first half of this year, the Keefe Bank Index rose 25% while the Standard & Poor's 500 stock index was up just 19%.
They did even better in the first half last year, when they rose 6% while the S&P index was declining 4%. In the second half, bank stocks tumbled 8% while the broader index rose 3%.
That slide began last September after investors suddenly came to grips with the notion that the Federal Reserve was not nearly done raising rates in an effort to slow the economy, head off inflation, and discourage speculation in exotic financial instruments.
In fact, lackluster-or-worse second half performances have been all too typical for bank equities, according to a study of bank stock price movements by Keefe, Bruyette & Woods Inc.
During the 25 years from 1970 through 1994, the Keefe Bank Index rose 8.6% annually on average, which was better than the 7.8% typical yearly gain for the S&P 500.
But the average first half gain for the bank index during those years was 7.5% while the second half gain was an anemic 1.5%. And the trend has intensified in the last 15 years, with first-half gains averaging 10.5% and second-half returns still stunted at 1.5%.
Looked at another way, bank stocks tallied first-half gains in 17 of the past 25 years, or two-thirds of the periods. By contrast, they rose in the second six months of those years only half the time - and often by less- impressive margins.
And the Keefe data make clear how steep the odds are against a continuation of this year's rally.
On those instances during the past quarter-century when the bank index has risen in the first half, it has been able to do better in the second half only twice.
The last time was 15 years ago, when the bank index rose 8% in the second half compared to a 4% gain in the first half.
The other occasion was in 1972, when a 17% second-half gain followed an 8% first-half increase.
In bank stocks' best years since 1970, investors clearly made the most money during the first half.
In the top year of 1991, when the stocks rebounded 55% from all-time lows, the first half gain was 27% and the second half 22/%.
The 35% gain during 1976 was concentrated even more lopsidedly into the first half, when the stocks gained 26%.
Conversely, most of bank stocks' worst outings have taken place in the second half. They fell 27% in the last six months of 1987, the year of the crash, and 26% in the last half of 1990.
