Bank stocks took it on the chin Wednesday amid growing suspicions that the stock market may be headed for a serious downturn.
"The market is in a full-fledged correction, which has more to go," said Lehman Brothers technical analyst Stephen W. Shobin.
Stock prices have fallen in markets around the world in recent days, as investors see increasing evidence that U.S. corporate profit growth is running out of steam. But many analysts are not ready to call this latest selloff an extended correction.
"It's a reality check," said Marshall Acuff, chief market strategist at Salomon Smith Barney. "The broader market started to correct itself in early April, and now the Dow is catching up. Meanwhile, the broader market continues to correct itself."
Though earnings forecasts for banking companies outshine those of most other industries, commercial and investment banks were hit hard Wednesday, with the Standard & Poor's bank index falling 1.63%; the S&P 500 fell only 0.16%.
In fact, behind the face of merger mania, investors have been shedding bank stocks for some time. Since April 14, the day after the blockbuster BankAmerica-NationsBank and First Chicago NBD-Banc One merger announcements, the Standard & Poor's bank index has fallen 8.8%, compared to 2.2% for the S&P 500.
Bank stocks' recent poor performance concerns some analysts who think falling interest rates ought to be providing shelter from the storm.
"We've seen a fairly strong bond market lately, which to me suggests banks should outperform the rest of the market," said Scott Edgar, director of research at Sife Trust Fund, Walnut Creek, Calif. "The fact that banks have been so weak in this environment is a little unusual."
Banks stocks have soared in recent years, thanks to consistently strong earnings growth and the expectation that mergers would continue their spectacular pace.
To date there are few concerns that bank earnings overall are about to head south. According to First Call Corp., in the past week analysts have cut earnings estimates on five banks and thrifts while raising estimates on three.
But some analysts say investor expectations about bank mergers are changing.
If April's merger announcements offered a taste of the size and structure of future bank deals, these much-anticipated deals may not be to investors' liking.
That's because the blockbuster transactions were structured as mergers of equals, which means they failed to contain the big premiums that many investors have come to love and expect.
Bank chief executives, such as Fleet Financial Group's Terrence Murray, have said that investors ought to expect more mergers of equals because, as bank mergers grow ever larger, it will become more difficult for buyers to fork over big premiums.
The slippage in bank stocks may also have been worsened by Mellon Bank Corp.'s decision April 22 to reject an unfriendly takeover bid from Bank of New York Co. that offered a 28% premium over Mellon's market price, breaking the seemingly inexorable momentum of mergers.
"You can just about time the underperformance of the bank group to when Mellon said 'no,'" observed David S. Berry, director of research at Keefe, Bruyette & Woods Inc.
Absent any fresh merger news, he said, investors are back to worrying about the "Asian contagion," which caused big trading losses at a few internationally oriented U.S. banking companies late last year and arrested the rise in stocks at most regional banking companies.
"People saw the first-quarter numbers in March didn't affect banks as much as they feared, so they said, 'Oh, that's not so bad!'" Mr. Berry said. "But it's foolish to think the problems with Asia will disappear in one quarter. People forgot about what was happening there too much, and now they're thinking about it again."
Mr. Shobin, the Lehman technical analyst, said the market's inability to embrace good news like strength in bonds "underscores how weak current conditions are." Investors appear more worried about earnings than rates.
For those who may have forgotten during the market's long bull run, Mr. Shobin offered a definition of a market correction.
"The purpose of a correction is to resolve speculative excesses from the prior cycle, and that process is usually a painful one," he said. "Conviction crumbles as the result of pervasive decay. All stocks and groups get hit. A sense of 'no place to run or hide' develops, and this ultimately creates a bullish supply-demand balance."