Almost three dozen banks are getting an unexpected boost in the stock market because they're part of a new Standard & Poor's Corp. index of smaller companies.
The banks' stocks are being gobbled up by mutual funds and similar investment vehicles whose performance is tied to the index.
"I'm confident this is a significant reason the banks have done well in the market the last few months," said Stephen J. Paluszek, a bank analyst at M.A. Schapiro & Co., New York.
"It's no doubt been a factor, although some of the stocks have their own stories and have moved for those reasons as wel," added Virginia A. Adair, a bank analyst at Merrill Lynch Capital Markets.
Factor in Quarter's Choppiness
The index was also likely responsible for increased price volality during the third quarter, some Wall Streeters said.
The S&P MidCap index, a group of 400 middle-sized companies that includes 31 banking stocks, was unveiled last June as a complement to the widely watched S&P 500 index of large capitalization stocks in the nation's equity markets.
The timing was perfect: Both index-related stock trading and smaller company stocks are currently fashionable on Wall Street.
At least one investment company, Dreyfus Corp., has created a new fund focused on the Index, the Dreyfus Peoples S&P MidCap Index Fund. The fund opened for business only five weeks ago.
The banks in the index include Fifth Third Bancorp., Cincinnati; Central Fidelity Banks Inc., Richmond, Va.; Corp., Winston-Salem, N.C.; the Bank of New York Co., New York; and West One Bancorp, Boise, Idaho.
Strong Gains Reported
The MidCap index gained 9.5% through the end of the quarter, including dividends, according to an S&P spokesman.
The S&P 500 index was up a much smaller 5.35% during the quarter and the Dow Jones industrial average rose 2.8%.
Among MidCap banks, Central Fidelity's stock gained 17% during the quarter and Fifth Third's was up 13.9%. Both substantially bested the American Banker index of the nation's 225 largest publicly traded banks. It gained 5.2% during the quarter.
In fact, regional bank stocks overall gained nearly 15% during the quarter and were among the best performing equities in the stock market.
'Carryover Effect from Banks'
"Psychologically, I think there was carryover effect from banks in the index to others of about the same size," said Mr. Paluszek. At the same time, he noted, "a lot of fast money in these stocks, almost like some technology stocks," sparks volatility and can reinforce downturns as well as price increases.
Ms. Adair agreed, pointing out that "when stocks go into an index they are trading as part of the index as well as their own fundamentals."
Mr. Paluszek said banks, as well as other stocks, could quickly lose ground if index trading falls from investor favor. And some bank stocks may be trading beyond their fundamentals at this point, he said.
Financial companies constitute 15.1% of the index. Besides banks, there is the Federal Home Loan Mortgage Corp., a government-sponsored secondary mortgage market firm that has the largest market cap in the index at $5.3 billion.
Major banking stocks slipped another notch as equity investors marked time in anticipation of today's unemployment report from the Department of Commerce and the advent of third-quarter earnings reports.
West Coast banks were hit especially hard. BankAmerica Corp., San Francisco, eased 87.5 cents to $40.625 while rival Wells Fargo & Co., fell $1 to $71.75. Security Pacific Corp., Los Angeles, dropped $1 to $31.75 and First Interstate Bancorp, also in Los Angeles, slipped 87.5 cents to $28.875.
But the most slippage occurred at Republic New York Corp., which was off $1.625 to $66.125 in late afternoon trading. Analysts blamed meager trading volume of 22,000 shares.
Only a handful of banks among the top 50 institutions posted gains: KeyCorp, Albany, N.Y., was ahead 25 cents to $41.625 and Society Corp., Cleveland, was up 25 cents to $47.
H.F. Ahmanson & Co., Los Angeles, was off 50 cents to $17.375.
The Federal National Mortgage Association was off $1.625 to $64.50 and the Federal Home Loan Mortgage Corp. was down $1.125 to $103.75.