Bank stocks gained further Monday in the continuing afterglow of the Federal Reserve's latest cut in interest rates as well as the prospect of additional cuts soon.
The Fed's surprise move last week dramatically reduced the fear factor among investors that had done so much damage to bank stocks since the summer and particularly during the last month.
"Not only were investors throwing out the baby with the bathwater, they were throwing out the bathtubs, too," said James Ellman, portfolio manager for the AIM Global Financial Services Fund.
"Investors now realize the Fed is going to do whatever it can to avoid a depression.
That's right, depression," he said. "The market was actually discounting for a depression, not a recession."
He and others along Wall Street think the central bank is likely to cut short-term rates further, perhaps as soon as the Fed's next monetary policy meeting, Nov. 17.
The informal consensus right now is for another two reductions in the near future.
That would put official short-term rates a full percentage point below their September level.
All of which would be good news for earnings prospects throughout the financial sector and also bodes well for investor psychology.
Fed Chairman Alan Greenspan "left the door open to ensure that the economy continues to show improvement," said banking industry analyst Frank J. Barkocy of Josephthal & Co., New York. "And if it takes another rate cut or two to strengthen the economy, then he will do it."
In Monday trading, the Standard & Poor's bank index rose 1.57%, outpacing the Dow Jones industrial average, which was up 0.59%. The Nasdaq Bank index rose 1.19%, and the S&P 500, 0.57.
Gainers included Bankers Trust Corp., up $3.375 to $54.75; J.P. Morgan & Co., up $3.375 to $92.875; and BankAmerica Corp., up $3.25 to $52.875.
Further Fed rate cuts would give concrete help to banks and other financial sector companies by returning a positive slope to the yield curve-the line charting yields on Treasury securities of various maturities. A positive curve makes bank lending more profitable.
Economist Scott J. Brown of Raymond James & Associates in St. Petersburg, Fla., along with other economists, said he expects the Fed to cut rates again soon out of the desire to avoid a credit crunch.
Yet some market experts were skeptical about what another cut in interest rates would do for bank stocks.
The rally in these stocks Monday "is the usual knee-jerk reaction to lower interest rates, which is a pretty narrow way to look at bank stocks," said industry analyst Michael Mayo of Credit Suisse First Boston.
The problems affecting "multinational banks include quite a lot that is outside the Fed's control," emphasized Mr. Mayo. "The sustainability of the current rally is questionable without additional attempts to mend the global financial system, which is bending at the seams."
William Katz, bank analyst at Merrill Lynch & Co., also said rate cuts are not a panacea for the troubles facing U.S. banks.
It will be much more difficult for mid-cap banks to pass on already-low interest rates to consumers, Mr. Katz said. Consequently, banks are likely to experience further compression of net interest margins, which eventually would hurt earnings growth.
And Mr. Brown, the economist, said that in spite of the market's optimism about more rate cuts the rally in bank stocks could easily be derailed.
"The next couple of weeks could get hairy because there will be a lot of economic data out and the elections are coming up," he said.