Bank stocks continued their rise Tuesday as investors anticipated a summer rally.
Buyers have been optimistic that the Federal Reserve is almost finished tightening credit ever since it raised short-term interest rates 50 basis points on May 16. In addition to that hike, the Fed has raised rates 25 basis points five times since July.
"The market is discounting future interest rate hikes. Bank stocks are rallying ahead of the Federal Reserve," said Adam J. Lewis, senior vice president and bank stock trader at Keefe, Bruyette & Woods Inc. "The market is thinking that the Federal Reserve will tighten one or two more times."
The American Banker index of the 50 largest banks rose 1.36%, while its index of 225 banks rose 2.30%. Some pointed to Washington Mutual Inc., the nation's largest thrift, which has a highly interest-rate-sensitive balance sheet, as an indicator of market sentiment about the Fed's plans. On Tuesday shares of the $175 billion thrift, headquartered in Seattle, rose 43.75 cents, or 1.50%, to $29.5625.
Other gainers included Pittsburgh-based PNC Financial Services, up $1.4375, or 2.98%, to $49.75; Chase Manhattan Corp., up $3, or 4.26%, to $73.50, and Citigroup, up $2.0625, or $3.54%, to $60.3125.
Chase and Citigroup rose because they rely heavily on capital markets revenues. The Nasdaq index, which is made up mostly of technology companies that are potential clients, rose a record 254 points, to 3459.30.
Traders also said that bank stocks climbed because the group tends to rally in the summer. "There is usually choppiness in the first quarter and then investors become euphoric about bank stocks during the summer," Mr. Lewis said. "But this summer it will be hard to tell. So far, rallies in the group are not lasting."
Shares of Zions Bancorp, of Salt Lake City, have been gaining on merger speculation. After rising 13% over the past week, they jumped $1.8593, or 4.14%, to $46.7968 on Tuesday.
Zions and First Security Corp., also of Salt Lake City, had plans to merge until troubles at First Security scuttled the deal. Wells Fargo & Co. then stepped in and purchased First Security.
"When the First Security and Zions deal collapsed, investors from both sides were disappointed," said Vincent Piazza, an analyst at Standard & Poor's. "When First Security merged with Wells Fargo & Co., that prompted some speculation about Zions."
Wells Fargo will be a formidable competitor in Utah, Mr. Piazza said. "We would not be surprised if [Zions] sought a suitor," the analyst said. "First Security and Wells puts a mammoth company in their neck of the woods."