Bank stocks took a beating on Friday as stronger than expected job statistics raised the spectre of a rate hike by the Federal Reserve.
The Labor Department reported 348,000 nonfarm jobs were added to the economy in May as opposed to 153,000 that economists expected, causing bond and stocks prices to plunge.
As bond yields - which move inversely to bond prices - rose to 7.07% in early morning trading, the Standard & Poor's Bank Index plummeted. By midday it had fallen 2.17%, outpacing declines of 0.75% in the Dow Jones industrial average and 1.15% in the S&P 500. By the close, the S&P Bank Index had tightened up to 1.24%, the Dow to 0.53%, and the S&P 500 to .04%.
The downward pressure on stock prices created such a selling frenzy in the morning that trading in Wells Fargo & Co. and CoreStates Financial Corp. shares was temporarily halted.
The bigger losers at the close of the day included Mellon Bank Corp., which fell $1 to close at $58.125; Signet Banks Inc., off 75 cents to $25.875, and BankAmerica Corp., which fell $1.875 to close at $76.875.
Analyst Livia Asher of Merrill Lynch & Co. said there was nothing "onerous" about the decline in Mellon's share price. The stock broke its 12-month high last Tuesday and "this downdraft is the stock giving back some of its outperformance," Ms. Asher said.
Economist Scott Brown at Raymond James & Associates, St. Petersburg, Fla., said he thought "it is very, very likely that the Fed will raise interest rates" this summer, although he predicted an increase of only 25 basis points.
However, analyst Thomas K. Brown of Donaldson, Lufkin & Jenrette, said that he would be "surprised" by such a move.
"Since the beginning of the year, we have alternated between the economy slowing and growing," said Mr. Brown. "The economy and inflation are doing just fine. We are in a period of low inflation and steady economic growth and that is a good environment for the financial companies."
Analyst James Marks of Hancock Institutional Equity Service in San Francisco dismissed Friday's bank stock selloff. "The generalist portfolio manager, who doesn't have deep expertise in banks, reacts mostly to rates and jettisons these banks," said Mr. Marks. "But when you correlate bank stock performance changes over the long term (that thinking) doesn't hold up."
Analyst Jarius Dewalt of M.R. Beal & Co. said the market's interpretation of the numbers is "irrational," because "inflation is not there." "We think that the economy is moderately paced and could go faster ... it definitely shouldn't be growing slower," Mr. Dewalt said.
Mr. Dewalt argued that a market correction is inevitable and that investors should not invest in the banking industry as whole. He pointed to buying opportunities in CoreStates, Citicorp, SunTrust Banks Inc., and Bank of Boston Corp.