Bank stocks rebounded strongly Wednesday, giving some market watchers a glimmer of hope that recent lows would mark the bottom for the year.
The buying was the market's reaction to the Federal Reserve's decision the previous day not to raise interest rates, but to adopt a "bias" toward higher rates in the future instead.
Immediately after the announcement on Tuesday, bank stocks fell sharply. But later in the day they regained much of the earlier loss, and the rally continued on Wednesday.
Almost all bank stocks were up. The Standard and Poor's index of 31 banks rose 2.1%, and the Nasdaq index of 721 banks rose 2.3%. Broad indexes also rose, with the Dow Jones industrial average up 1.8% and the S&P 500 up 1.9%.
"It looks like the first week of October will be the low for 1999," said Mark Davis, director of research of Banc Stock Group of Columbus, Ohio. "The market has been greatly oversold."
Henry Dickson, an analyst at Salomon Smith Barney, a Citigroup Inc. unit in New York, said that with "interest rates a little more stable," investors might see bank stocks as undervalued. He also said that "few surprises" are expected in bank earnings estimates, and that this should encourage buyers.
"We are in the process of putting a foundation in the ground right now in which people can have a little more confidence in their outlook than a few months ago," Mr. Dickson said.
Also on the bright side, Mr. Davis of Banc Stock Group said a "huge amount of cash is on the sidelines" that will help boost bank and other stocks in the months to come. In the last 12 months, money market deposits have increased $400 billion, to $1.5 trillion.
"People are poised and waiting to come back into these markets," Mr. Davis said. "Those people are looking for an end to the inflation fears and solid third-quarter numbers."
Mr. Davis said, "We can rally back up another 2.5% to 3% without hitting any dramatic resistance."
"Maybe financial stocks have been oversold on emotions," said David Ellison, portfolio fund manager at FBR Fund Advisors in Boston. "The numbers coming out for the quarter are probably going to be O.K. People have either stopped selling these names or are starting to buy them."
All the big names were up. Citigroup rose $1.1875, or 2.6%, to $46.375; Chase Manhattan Corp. 31.25 cents, or 0.4%, to $75.9375; Bank of America Corp. $1.125, or 2%, to $58.875; J.P. Morgan & Co. $3.50, or 3%, to $118.75; and Bank One Corp. 50 cents, or 1.5%, to $35.
Not all is bright. Government regulators have been concerned about rising problem loans, and on Tuesday Julie Williams, chief counsel in the Office of the Comptroller of the Currency, said she was concerned about a spike in problem loans shared by at least three banks and at least $20 million in size.
Some analysts were cautious on a longer-term basis. It will be hard for big banks over the next 18 months to sustain the robust revenue growth in lucrative business lines such as trading, venture capital, and underwriting, Mr. Ellison said.
"It's not like we're out of the woods here," Mr. Ellison said. "The next 18 months will tell whether growth will continue to look really juicy."
Amid Wednesday's rally, Providian Financial Corp. rose $9.75, or 11.9%, to $91.6875, in response to a report in The San Francisco Chronicle that the credit card issuer was in talks to address consumer complaints being investigated by the San Francisco's district attorney's office. Some analysts attributed the sharp rise to short sellers exiting their positions in anticipation the district attorney's office would drop its investigation, said David Berry, an analyst at Keefe, Bruyette & Woods Inc.