Investors, betting bank shares are at or near their lows for the summer, kept financial stocks in the black for a second consecutive day, countering a skittish response to the Federal Reserve Board's decision not to move a key interest rate.
The KBW Bank Index rose 0.4% Wednesday after rising 2.5% a day earlier. It had been up nearly 3% during Wednesday's trading session before the Fed's announcement.
"We're calling it a dead-cat bounce. The sell-off from early May to last week was dramatic, so now you're seeing some short-covering to take profits and some others stepping in to try to get some bargains," Gerard S. Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said in an interview Wednesday. "They were bound to come back, but we think financials will run out of gas this summer."
The rebound in financials helped push the broader markets into positive territory. The Standard & Poor's 500 rose 0.6%, and the Dow Jones industrial average inched up 0.04%.
A wide range of banking companies posted gains. Integrity Bancshares Inc. rose 36%, Amcore Financial Inc. rose 13.4%, and Huntington Bancshares Inc. rose 4.3%.
Zions Bancorp. rose 5.3%. Greg Ketron, a Citigroup Inc. analyst, wrote in a note that the Salt Lake City company should be able to maintain its capital levels without a highly dilutive infusion.
If credit conditions deteriorate, it could raise up to $500 million of preferred and hybrid capital, Mr. Ketron wrote.
The Fed Open Market Committee adjourned its two-day meeting Wednesday afternoon and said it would leave its benchmark interest rate at 2%, as most economists expected. Comments by committee members that they are concerned about inflation indicate rate hikes are possible this year, but they gave no indication of an imminent increase this summer.
"Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters," the Fed policymakers wrote.
Some economists said the Fed's stance signaling to Wall Street that for now concerns that higher rates would stifle any forward economic progress at least equals worries about inflation.
Sung Won Sohn, an economist at California State University, Los Angeles, wrote in a research note Wednesday, "The economy lacks financial underpinning necessary for sustained recovery." The Fed's "wait-and-see" stance on interest rates "is the best modus operandi for the moment."
But he and other economists said the market had expected the Fed not to move its key rate this month, and investors pulled back in late trading after absorbing the parallel concerns about inflation and economic weakness.
Scott A. Anderson, a senior economist in Wells Fargo & Co.'s Minneapolis offices, wrote in a research note late Wednesday that financial markets remain under "considerable stress."
With food and fuel prices on the rise, the Fed left the door open to a rate hike this year, and investors "almost certainly" picked up on this as a reason for concern, he wrote.
Other data released Wednesday provided further evidence of an anemic economy.
The Commerce Department said sales of new single-family homes fell 2.5% last month from April. The decline was the fifth in six months.
The department also reported that durable goods were flat last month — an indication that manufacturing companies are hurting from the economic slowdown.
The bank decliners included National City Corp., which fell 0.8%. The Cleveland company hired Richard L. Michel, a Citigroup Inc. veteran, as its vice chairman in charge of commercial banking, filling a position that has been open since last year.
Mayflower Bancorp Inc. dropped 17.3%, and Washington Mutual Inc. fell 4.5%.