For some reason, bank stocks are behaving a lot like they did in August of last year, according to analysts at Lehman Brothers.
The parallel is particularly striking for the largest-capitalization bank stocks, which have recently been among the most volatile market performers.
A year ago global financial markets were reeling from twin financial crises in Russia and Asia, and the Federal Reserve was on the verge of cutting interest rates to inject liquidity. This year the concern is a too-hot U.S. economy and revived conditions abroad, with the Fed poised to raise rates as a hedge against inflation.
But while the business scenarios of this summer and last could hardly be more different, the movement of bank stocks could hardly be more similar.
"We note the similar mid-August, three-day bounce that occurred in 1998, which preceded a significant decline thereafter that lasted throughout the rest of the month," the Lehman analysts said.
On Thursday banks continued falling for a second day after sharp gains on Monday and during three days last week. The Standard & Poor's bank index dropped 1.29%, and the Nasdaq bank index 0.64%. The Dow Jones industrial average was off 0.25%, while the S&P 500 lost 0.69%.
"The jury is still out on whether the positive performance posted last week will be a head-fake similar to that which occurred in August 1998," the Lehman analysts - Diane B. Glossman, Michael A. Plodwick, Robert S. Patten, and Kenneth M. Usdin - said in their weekly report.
"Over the past few weeks the 1999 stock performance of both our bank universe and the broader market has started to look remarkably similar to that of 1998," they noted. "Granted, bank stock performance in 1999 has been muted on the upside by several percentage points when comparing the two major peaks in both years."
Last summer "market sentiment was driven by surprising negative events -- global financial instability and the uncertainty surrounding its resolution," the analysts said.
"Although we cannot be certain that a similar market-dislocating event is not bubbling below the surface this year, we do believe the tone of the 1999 pullback is fundamentally different," they said.
"Fears of an interest rate increase and the ongoing strength of the domestic economy have been driving the market for much of 1999, as opposed to the liquidity concerns and economic disarray in emerging markets that were prominent last year," they noted.
This year bank stocks in the Lehman composite index hit their summer peak on July 6, then declined by 8.8% before recovering by 5%.
R. Harold Schroeder of Schroder & Co. looked at some factors moving bank stocks.
Overall, banks are in better fundamental shape than at any point in the past 20 years, Mr. Schroeder said. "That said, we have specific concerns about credit quality, execution, risks related to recent acquisitions, prospects for additional Fed rate hikes, and weaknesses in various global economies."
Commercial credit problems and nonperforming assets are on the rise. "Unfortunately, loan-loss reserve levels are getting thin, requiring higher loan-loss provisions," Mr. Schroeder said. "This could slow earnings growth."
Mr. Schroeder, who unveiled his summer picks, said he was aiming for "quality names in good geographic regions" and came up with SunTrust Inc. as his favorite stock pick.
Mr. Schroeder pointed to "the above-average growth potential in SunTrust's existing geographic footprint, a top three position in these markets, conservative management, a new 4.7% share buyback, and a long history of quality earnings."