Bank stocks dragged down the markets Monday, as good news about the economy revived fears of higher interest rates and caused bond prices to fall.

The Standard & Poor's bank index dropped 1.5%, to 536.70, while the broader S&P 500 index fell 0.24%, to 885.20. The Dow Jones industrial average lost 14.93 points, ending the day at 7,672.79.

Central bank policymakers on the Federal Open Market Committee are still widely expected to forgo a rate hike when they meet today and Wednesday, but continuing economic strength seems likely to force the issue in coming months.

Personal income growth, consumer consumption expenditures, and new-home sales were strong in May, according to reports Monday.

Personal income and consumer consumption each increased 0.3%, and new- home sales reached 825,000 units, the third-highest level in the past 12 months.

"The housing sector is doing surprisingly well for the seventh year of an economic expansion," said Kenneth T. Mayland, chief economist at KeyCorp, Cleveland.

"I hate to say it, being a banker, but if the bias on rates is to the upside, the tendency of bank stocks is modestly to the downside," he said. But he added that other factors, like increased loan demand and improving credit quality, could offset banks' vulnerability to higher interest rates.

The Chicago Purchasing Managers Report, which is considered a preview to the broader National Association of Purchasing Managers report, showed strong growth in manufacturing. Production rose in June to 61.5 from 56.8. New orders, which indicate future production, were at 69.7, going like "gangbusters," according to Mr. Mayland.

"The message here is, the economy continues to perform exceedingly well and still seems to be on an uptick," he said.

Federal Reserve policy has been highly effective in managing the traditional boom-and-bust business cycle, Mr. Mayland said, staving off euphoric highs and dangerous lows that create downturns.

Barring unforeseeable events that could rock the market, analysts continue to like the prospects for bank stocks.

NationsBank Corp. closed down 50 cents, at $64.75, though it had gained as much as $1 earlier Monday as investors reacted favorably to its announced purchase of Montgomery Securities in San Francisco. However, analyst Nancy A. Bush of Brown Brothers, Harriman & Co., cut her rating on NationsBank from long-term "outperform" to "market perform." She said the company's latest acquisition is "absolutely ill-advised."

BankBoston Corp. dropped 37 cents, to $72.375. Even so, Credit Suisse First Boston started coverage on the company with a "buy."

"We think BankBoston has underperformed the group, trading at 11.4 times 1998 earnings per share," said Bradley Ball, a First Boston bank analyst. "We think it's an inexpensive stock." His target price: $86 within 12 months.

Mark Fitzgibbons of Sandler O'Neill & Partners started coverage on Peoples Bankshares of Brockton, Mass., with a "buy."

He called the $549 million-asset thrift "an undervalued and overlooked story, trading at less than 10 times 1998 earnings, yet generating a return on equity in excess of 16%." He said he expects the stock to reach $19 within 12 months, but its shares remained at $15.25 during Monday's session.

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