Financial companies' shares fell Monday as investors worried that rising oil prices would lead to a hard landing for the economy.
As investor sentiment turned negative, American Banker's index of top 50 banks fell 3.37%, and its index of 225 banks fell 4.12%.
"It is scary," said Adam J. Lewis, senior vice president at Keefe, Bruyette & Woods Inc. Investors, who began to concentrate on the macro-economic picture last week, decided over the weekend to get out of economically sensitive shares, he said. "It's market psychology. People don't ask questions. They sell."
News that crude oil prices had risen above $37 a barrel for the first time in 10 years appeared to contribute to the selloff. The price spike was attributed to concerns that tensions between Iraq and Kuwait could disrupt the output from the Persian Gulf.
The "macro issues are not going away over night," Mr. Lewis said. He predicted this would be the "worst September" in years, as investors react to high energy prices, slower earnings, and the prospect of sluggish consumer spending as incomes are hit by the rising cost of fuel and heating oil.
The rotation of investor money out of tech stocks and into financials, which boosted financial shares recently, was not in evidence Monday, as the selloff ran through all sectors of the market, Mr. Lewis said. The Dow Jones industrial average fell 1.08%. The Nasdaq index fell 2.83%.
Katrina Blecher, managing director of research at Sandler O'Neill & Partners, said it is "unusual that technology stock and financials fall at the same time, but I don't think this is going to last."
She expressed confidence that regional banks in particular would resume their climb, as their shares still trade at a significant discount to the banks with bigger market capitalization. The big banks and brokers also remain attractive, and "the stocks just got a little ahead of themselves," she said.
Diana Yates, an analyst at A.G. Edwards & Sons, said the market "woke up to the fact that a slower economy might mean slower earnings." She also said she considers the current market conditions a buying opportunity.
Among the shares that suffered most Monday were Chase Manhattan Corp. and J.P. Morgan, which announced a merger agreement last Tuesday. Chase fell $2.5625, or 5.22% to close at $46.5625, and J.P. Morgan - whose shareholders would get 3.7 shares of Chase for every J.P. Morgan share when the deal closes, was down $9.0625, or 5.19%, to $167.4375.
Ms. Blecher said the market reaction is typical after a merger announcement, as people tend to refrain from investing until they "get a special feel" about a deal.
Citigroup shares also fell $1.50, or 2.72%, to $53.5625, and U.S. Bancorp dropped $1.375, or 6.16%, to $20.9375. Morgan Stanley Dean Witter & Co. decreased $4.25, or 4.31% to $94.25.
Meanwhile, James M. Schutz of Stephens Inc. in Little Rock downgraded Southwest Bancorp of Texas to "outperform" from a first-grade "buy." The Houston banking company will not meet the 20% annual appreciation price that is one of the criteria for inclusion on Stephens' buy list, Mr. Schutz wrote in a research note.
"We still maintain that this bank possesses an excellent management team focused on strategy to boost growth and profitability," he wrote, but "the stock could be due for a rest."
Mr. Schutz expects Southwest to earn $1.37 per share this year and is maintaining his target price of $38, or 24.8 times estimated per-share earnings. Southwest shares slipped 43.75 cents, or 1.29%, to close at $33.50.