Banks were caught in a strong wave of selling in Friday's market.
Although most banking companies reported solid third-quarter numbers this week, as did many companies in other sectors, the market overall fell sharply on concerns about the technology sector and, of course, interest rates. And banks got caught in the tide.
The Dow Jones industrial average endured a wild ride on Friday, closing down 92 points, and off 2% for the week. The stock market wobble was noteworthy because it came during a week when most companies reported solid earnings. Such reports have driven up the market in the past. This time, two-thirds of all companies reported surprisingly good earnings and fewer than one-fifth missed earnings estimates, according to Lehman Brothers market strategist Jeffrey Applegate.
"Earnings are exceeding expectations," Mr. Applegate said, "but it doesn't matter. The market is focusing on the Fed tightening rates now."
The next meeting of the Federal Reserve's committee that sets interest rates is scheduled for Nov. 12. Last week, in an apparent effort to talk down the markets, Fed chairman Alan Greenspan told a congressional committee that "the economy has been on an unsustainable track."
Bond traders apparently interpreted Friday's housing statistics as evidence. The government reported housing starts in September rose 7.9%, higher than expected after two months of declines. That news drove down the bond market and pushed yields up to 6.44% on the 30-year Treasury bond.
Ralph D. Gibson, senior portfolio manager at Banc One Investment Advisors, with $43 billion of assets under management, attributed the market fall to "some high-profile companies disappointing for different reasons."
Technology stocks such as Intel Corp. and Sun Microsystems Inc. dropped on concerns of a slowdown in their industry. And Sears surprised investors last week by reporting higher-than-expected credit card losses.
Such volatility in big companies' share prices shouldn't be terribly alarming, Mr. Gibson said, because over time large cap stocks are twice as volatile as small caps, according to a report issued by Banc One's economics research team. But disappointing news from such familiar names means many investors consider this to be a good time to take the money and run.
"Just a whiff of a slowdown is enough to cause a selloff these days," he observed.
Friday's selloff dragged down the S&P bank index by 1.42%. Henry C. Dickson, bank analyst at Smith Barney, attributed the fall to profit taking and said banks' earnings reports so far indicate their stocks can rise. "Asset quality is still pretty strong, and nonperforming assets are still going down, although not as much as before," he said.
He added that banks such as First Chicago NBD Corp. showed notable improvement in credit card chargeoffs, and that no banks showed the levels of deterioration seen in previous quarters.