Banks stocks rallied Wednesday, outpacing the market for the first time in almost a month, but many investors remain nervous and wary.
The Standard & Poor's bank index soared 2.31%, while the Dow Jones industrial average rose only 1.06%. The Nasdaq bank index climbed 1.33%, and the S&P 1.43%.
Shares prices of most of the top 50 banks rose. Gainers included First Union Corp., up $2.375, to $56.3125; Citicorp, $2.35, to $147; and Comerica Inc., $2, to $56.3125.
The recovery came a day after bank stocks were rocked by one of the deepest selloffs of the year. And Tuesday's experience left a deep impression on many investors.
On Wednesday, stability in Asian markets lifted the pall from Wall Street, and relatively low prices for stocks lured bargain hunters. Still, fears of a reappearance of market volatility and of further negative news from overseas continue to nettle some of the most bullish investors.
"Overall, this rally is a relief rally but not an enthusiastic recovery," said Scott Edgar, director of research at SIFE Trust Fund. "Not everyone is convinced that the near-term bottom has been reached."
He voiced the worry of many investors: "I am more concerned about what will happen when we stop correcting. Will the market regain its highs, or will we muddle along in a trading range?"
James Ellman, portfolio manager of AIM Global Financial Services Fund also expressed caution about the future of bank stocks.
"My screen is nice and green now, but I don't know if we are on our way to a nice steady rebound," he said.
Mr. Ellman, who is still fairly optimistic, said investors remain troubled by the financial tumult of overseas economies and the possibility of an inverted treasury yield curve-in which longer-term yields fall below those of shorter maturities.
An inverted curve means tougher going for bank profits and typically signifies an economic slowdown or even recession.
David S. Berry of Keefe, Bruyette & Woods Inc. asked: "What if we had a recession? Well, the answer is pretty straightforward, the banks are going to go down."
Nevertheless, Mr. Berry said, banks' fee income continues to look good, and Keefe analysts' earnings models for next year are not undergoing major changes.
Industry analyst Michael L. Mayo of Credit Suisse First Boston, said he thinks the worst is over for bank stocks.
"We believe that a good portion of the bad blood has left the market," Mr. Mayo said, referring to those investors who put money in bank stocks without factoring in the risks, thus skewing valuations.
"We estimate that $200 million in market value has been taken out of bank stocks in the last month," Mr. Mayo said. "Clearly the downturn has pushed the bad blood out, and investors are now factoring in more risk to the banks."
Alexander Colby, portfolio manager for Beacon Fiduciary Advisors, said he was not surprised by the rebound in the market. Investors he said, have overreacted to the turmoil in Asia.
"We do not expect a recession," said Mr. Colby, who is bullish on Citicorp. "The economy will get a little slow, credit quality will remain relatively steady, and interest rates will stay low."
M&T Bank Corp.'s stock's was one of the bigger losers of the day, sinking $2, to $508.125. It had been off as much as $13, or more than 2.5%.
The Buffalo-based bank, whose stock has fallen almost 14% in the last month, could be suffering from the devaluing Canadian dollar, which is hurting businesses near the New York border, said analyst Kevin T. Timmons at First Albany Corp.