After a long run as Wall Street's darlings, bank stocks are suddenly caught in a dramatic negative spiral and could face their first down year since 1994.

Enduring another day of near free fall, the Standard & Poor's bank index plunged 5.8% Monday and was off 31% from its July peak.

Major institutions like J.P. Morgan & Co. and BankBoston Corp. initially staged a weak recovery from last week's selling binge, but could not hold on to the gains.

In the rout, the Dow Jones industrial average plummeted 512.61 points, or 6.4%, the second-largest point drop and sixth-largest percentage drop. The blue-chip index tumbled to 7539.07, a level unseen since last October. The Dow, which hit its high in mid-July, is now off 4.7% for the year.

Ed Nicoski, technical strategist at Piper Jaffray & Co., labeled Monday afternoon's startling slide panic selling. "Selling has reached the emotional stage," he said.

The market's dramatic summer skid has dropped banks on the S&P roster to levels of July 1997. So far this year, the index is off by 15%.

Market strategists say economic turmoil from abroad, combined with dampened earnings expectations at many U.S. companies, has prompted a fundamental change in the way many investors view bank stocks.

"After the banks' great run, people got the mistaken impression that they are growth stocks rather than cyclical," said Bill Meehan, chief market strategist at Cantor Fitzgerald. He said he believes that "assuming there's no great disruption in the world, we're headed for an ordinary, average bear market."

That could mean more bad news for bank shareholders, since banks historically rank among the worst performers in bear markets.

In 1994, the last time the market turned seriously sour, the S&P bank index bottomed out at 210.77 points, 18% below its peak for the year. The Dow Jones industrial average bottomed out only 10% from its 1994 peak.

The more bullish analysts and investors point out that banks are more profitable now than in 1994, and insist the current selloff is an overreaction. Many are betting that regional banks will lead the sector's recovery, because their earnings should be unaffected by Asia and other economic trouble spots.

But such a recovery could be some distance off, because at least for now most safety-minded investors are buying U.S. government bonds rather than placing bets on stocks.

"The risk/return profile is just not good enough for investors to return to equities," said Michael Clark, head of equity trading at Credit Suisse First Boston.

Some investors say they will wait to see how far concerns over emerging markets will push down bank stocks before they resume buying en masse.

John Bogle, a portfolio manager who hunts for undervalued companies, said his firm-Numeric Investors, Boston-is not buying bank stocks more aggressively these days. The problem, he said, is that no banking company looks especially undervalued compared to another, as the entire group is tumbling.

Money-centers and regional banks from Amsouth Bancorp. to Zions Bancorp. fell sharply Monday. Wachovia Corp., which had been up as much as 87.5 cents most of the day on news it would acquire a credit card loan portfolio from Wells Fargo & Co., suddenly nose-dived at 3 p.m. and finished the day down $3.9375, to $73.3125.

A few investors with familiar names said they were buying regional bank stocks Monday.

James K. Schmidt, portfolio manager at the John Hancock Regional Bank Fund, said he sees opportunities in Summit Bancorp, Amsouth, and First Tennessee National Corp.

Despite weak stock performance of late, loan growth at these companies should remain strong, he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.