In what appeared to be a case of selling into good news, major bank stocks traded lower Thursday despite a string of strong third-quarter earnings reports and a rally in the bond market.
Given the run-up in bank stocks since Labor Day, it's not surprising that there would be some profit taking, said Diane Glossman at Salomon Brothers.
While it's unclear whether the correction has run its course, Ms. Glossman said she does not expect a repeat of the downturn that followed first-quarter earnings reports, during which bank stocks fell 15% in price.
A correction of 5%, though, is a possibility, she said.
Thursday's selloff came amid a strong rally in the bond market, where prices rose on reports showing that inflation is well under control. That sent bond yields tumbling.
The Dow Jones industrial average rose over 18 points, to 3621.63.
Lower interest rates are generally positive for bank stocks and other interest-sensitive issues, but that didn't hold true for banks yesterday.
J.P. Morgan & Co., which reported earnings that were well above the consensus of Wall Street analysts -- though not above the most optimistic prediction -- fell back Thursday by 75 cents a share, to $77.75.
A number of other banks that reported strong third-quarter earnings also lost ground, including Bank of New York Co., Wachovia, Norwest, and Continental Bank Corp.
Though Morgan's third-quarter earnings of $2.30 a share came in at the very top of analyst expectations, investors may have been disappointed that results weren't even better.
"Unlike some other banks, like First Chicago, we didn't have a blowout in the sense of [Morgan's] results being well in excess of all expectations," said Raphael Soifer at Brown Brothers Harriman.
First Chicago, which released its results Wednesday, was off $1.25 at $48.75 a share in late afternoon trading Thursday, after rising 62.5 cents to $50 in the previous day's session.
As expected, Morgan reported very strong trading revenue for the quarter, $464 million.
"Morgan had an outstanding quarter for corporate finance revenue and trading," said James Rosenberg at Lehman Brothers.
Some investors, though, have been disappointed that trading results did not exceed Morgan's second-quarter trading revenue of $520 million.
"I think that is sort of coloring the way banks are trading," said Judah Kraushaar, who follows money-center banks. At Merrill Lynch & Co.
More to Come
Morgan was the first of the big New York trading banks to report earnings. Most other money-center banks will release results next week.
In late-day trading, the other money-centers were selling at lower levels. Bankers Trust was off 50 cents at $81.875 a share, Citicorp $1.25 at $38.375 a share, Chemical Banking Corp. $1 at $45.125, and Chase Manhattan Corp. $1 at $36.50.
Still, Mr. Kraushaar said bank stocks are holding up better than they have in recent reporting periods. "That keeps me hopeful that we're not going to see a massive selloff in these stocks," he added.
Ronald Mandle at Sanford C. Bernstein said he's still upbeat about bank stocks, despite Thursday's declines.
"Our feeling is that bank fundamentals and earnings are improving -- and generally speaking, stocks are cheap," he said.
Mr. Mandle said his favorite stocks right now are Nations-Bank, First Union, and Bank-America. He also recommends Chase, Bankers Trust, Chemical, and Citicorp.