Financial stocks rallied on a positive day for the market Tuesday, as the latest crop of earnings produced generally positive news.
The American Banker index of 225 banks rose 2.66%, and the index of the top 50 banks 2.88%. The Dow Jones industrial average edged up 1.18%, and the S&P 500 0.17%. Advanta Corp.'s stock soared 40.74%, to $7.125, after the company announced that it had agreed to sell its mortgage business to an unidentified financial company. (See story, page 1.)
The company also reported net income of $15.7 million, or 62 cents per diluted share for class A and class B shares combined. This month Advanta had warned that it would not meet Wall Street estimates for the quarter.
Analysts attributed the recent recovery in the markets, particularly among financial stocks, to a general sense that profitability, for the most part, held up in the third quarter.
Kevin Caron, an associate strategist at Gruntal & Co., said that it is clear that "earnings are going to hold" for the companies in the Standard & Poor's 500.
Bruce E. Simmons, a principal and head of trading at Sandler O'Neill & Partners, said investors are enjoying "a little bid of an exhale," as relief sets in regarding the overall profit picture among U.S. corporations. "Credit concerns have proved to be isolated issues," he said. "Margins are compressed, but earnings are solid," particularly for thrifts.
But Adam J. Lewis, a senior vice president and bank stock trader at Keefe, Bruyette & Woods Inc., said there were hardly enough positive surprises to offset the concerns among investors about a possible profit crunch should the economy slow more dramatically than expected. "Fundamentals are deteriorating," he said.
The main reason for the recent market rebound is that the pessimism was overdone and stocks had been oversold in recent weeks, Mr. Lewis said.
"We may have seen the crescendo last week, but there will be no ongoing rally," he said. "Investors are still spooked and will be choosy."
Until economic data indicate clearly where the economy is going, the market will remain in a wait-and-see position, Mr. Lewis said.
Michael R. Laliberte, senior portfolio manager at Retirement Planning Company of New England, also said that investors are still nervous and seeking refuge in companies that have reported decent earnings, like MBNA Corp. and American Express Co. He also predicted that more traditional banking companies will have difficulty getting their stocks to rise.
Mr. Caron also said that mixed economic news remained of concern to investors. Rising oil prices could threaten the Federal Reserve's stable interest rate policy, and trouble in the Middle East further clouds the matter, he said.
Nevertheless, slow but steady growth of the U.S. economy and steadily rising productivity should provide an improving outlook for monetary policy as well as earnings, Mr. Caron said. Financial stocks should be able to benefit from this momentum, he said.
Mr. Simmons said he does not foresee a long-lasting rally but added that he believes "we've seen the low." Financial stocks will soon outperform the average stock, he said.