It is official now. Bank and thrift stocks are in the midst of a correction, with their value down more than 10% since their highs for the year.
Though significant, the slide has garnered little attention because the spotlight has been on the more spectacular declines in Internet stocks. The wane in the bank indexes began five weeks ago, shortly after the Federal Reserve raised interest rates.
The American Banker index of the 225 largest publicly traded banks has retreated 10.9% from its high for the year, which it reached a month ago. The nation's top 50 banks have done little better, falling 10.7% since their high on July 7. And the top 25 thrift stocks have been hit harder, dropping 13.5% from their peak on May 12.
"If the stocks start a day strong, weakness soon seems to show up," said John D. Rooney Jr., an analyst in New Haven, Conn., for Legg Mason Inc. "There is little conviction right now; it's as if the market is telling us 'other shoes could drop.'"
The slump has been worse than the performance of other kinds of stocks. By contrast, the Standard & Poor's 500 stock index has risen 0.69% since May 26.
Most analysts said it was unclear whether the slippage reflects anxiety that the Federal Reserve will raise interest rates again at its Aug. 24 meeting or whether it is a longer-term trend.
Bank stocks first soared in a relief rally after the Fed lifted rates a notch on June 30 as a preventive measure against inflation. However, a less sanguine pattern soon set in. Despite good second-quarter earnings, the stocks faltered.
"The selling into such good earnings was a little disturbing," said Frank W. Anderson, an independent banking industry analyst in Dallas.
"Big declines in some very high price-to-earnings stocks in the Internet sector have been hanging over the whole market," he noted. "But foremost, there are the rate concerns, which tend to hit bank and financial services stocks hard, whatever the earnings outlook."
Investor fears about "continuous rising rates are the biggest single factor," agreed analyst Henry C. Dickson of Salomon Smith Barney Inc. in New York.
Higher rates "increase the cost of capital, reduce the value of cash flows, and mean that other sectors may be doing better than the banks, so you have a relative performance issue," he said. And if rates rise high enough, they can eventually slow the economy and cause a rise in banks' nonperforming assets, he said.
"The odds don't favor banks outperforming ahead of a rate hike," said Anthony J. Polini, a New York analyst for Advest Inc. "We do think there will be a quarter-point rate hike on Aug. 24."
Mr. Polini predicted that, once the Fed's intentions are clear, "banks can modestly outperform" the market because of their relatively good earnings and attractive valuations."