When the Dow Jones industrial average surged to a record 9,544.97 on Wednesday, bank stocks were hanging onto the coattails of the rally rather than leading it.
In the first three trading days of the year, the Dow gained 3.7%, the Standard & Poor's 500 3.4%, and the S&P bank index 3.3%.
"We are in an Internet-focused market where the great plays are being made in technology," observed bank analyst Frank Barkocy of Josephthal & Co. "Unless something cataclysmic happens in that sector, these stocks will be the darlings for a while."
Some of the engines that have driven bank stocks higher in the past may not be a factor this year, analysts said.
The consolidation juggernaut may slow in 1999. In fact, most market experts don't expect mergers and acquisitions to take off until the second half.
Momentum investors also are out of the picture. Talk of a slowing economy and, consequently, slowing bank earnings sent many of these investors scrambling out of bank stocks into headline-grabbing technology issues.
That does not necessarily mean that bank stocks, which roared to life in the last two weeks of 1998, will be sputtering in a bullish market. Bank stocks are going to be the slow-and-steady-wins-the-race stocks of 1999, said Mr. Barkocy.
"Financial institutions should be recording very attractive gains and will stand up favorably in 1999," the analyst said. "At some point, value and momentum investors will be coming back because there are good opportunities and pricing upside in the sector."
Even if the economy slows, bank stocks can be expected to make gains on earnings, said Mr. Barkocy.
The analyst expects loan growth to be in the mid-single digits and only partially offset by loan-margin pressure. Fees in the capital markets and in capital management will improve, as well as operating efficiencies, he said.
Based on his universe, Mr. Barkocy expects fourth-quarter earnings of financial institutions to be up 11% to 13% from the year earlier. Earnings momentum is expected to continue in 1999, he said.
Bank analyst Joan T. Goodman in the Pershing division of Donaldson, Lufkin & Jenrette Inc. said she expects fourth-quarter earnings of some banks to suffer from special merger-related charges. But she pointed out that the market is looking past this quarter to more robust earnings in the future.
Bank stocks may not be the market leaders of 1999, but they will continue to be steady performers, said Ms. Goodman.
Consumer spending is high, margins are healthy, and interest rates are low, boding well for earnings at big regional banks this year, she said.
"We could definitely see a rally like we did Wednesday," said Ms. Goodman, referring to the day the Standard & Poor's bank index gained more than 2.5%.