Bank stocks got caught in a downdraft Friday as nervous investors engaged in another bout of heavy selling and added to the volatility that has recently bedeviled the financial markets.
The widely watched Dow Jones industrial average plummeted 247 points, to 7,694.66. It was the largest fall in point terms, but not percentagewise, since the market crash of October 1987.
In all, the market has eroded 8% in value from its peak of 8,340 reached in midday trading on Aug. 7.
But whereas banks led the market fall on Aug. 8 because of investors' worries about chances of higher interest rates, last Friday's jitters reflected the suspicion that share prices have gotten ahead of company earnings.
"People are starting to raise questions about the sustainability of earnings at the large-cap companies," said Doug Penn, senior analyst at American Express Financial Advisors, Minneapolis, which has $60 billion of assets under management. "Coca-Cola issued an earnings warning last week, and that's got people thinking other blue-chip companies that have fueled this rally could be next."
So far, investors seem not to be focusing their earnings anxieties on the largest banks, although nearly all bank stocks were buffeted on Friday. Citicorp dropped $2.875, to $133.50; BankAmerica Corp. fell $2.56, to $66.125; and First Chicago NBD Corp. surrendered $2.50, to $71.68.
The decline in bank stock may have been tempered by the fact that though many large banks have enjoyed fantastic runs lately, banks as an industry group have trailed the market since the last correction, in March.
Since March 10, the Standard & Poor's bank index has risen 3.6%, while the S&P 500 has risen 10.7%.
Still, the reality that bank stocks are trading at lofty prices means it is becoming increasingly difficult for sell-side analysts to find and recommend stocks that are cheap.
For example, Salomon Brothers analyst Diane B. Glossman lauded Synovus Financial Corp. on Friday as a "great company" and noted its stock has risen 22% this year, while her index of the 50 largest banks has risen 27.1%.
Despite this, Ms. Glossman rates the stock a "hold." It's "not cheap enough yet," she wrote, adding that at about $26 per share "the stock looks fairly valued."
Bear, Stearns & Co. bank analyst Lawrence R. Vitale said it's getting increasingly hard to find banks that are not fairly valued in today's market.
"To say that banks are cheap when they're trading at 13 or 14 times earnings is a little unusual. The companies have some proving to do," he said.
Nevertheless, on Friday Mr. Vitale upgraded shares of Banc One Corp. to "attractive" from "neutral." Banc One shares have lagged the market since the company bought credit card specialist First USA Inc. for $7.9 billion.
Investment bankers say the market's recent volatility has yet to discourage bank mergers, where acquisition prices are often determined by stock prices.
"Obviously there's some concern, but there is nothing that has manifested itself in economic data thus far that would indicate any reason to believe that there has been a sea change from the strong fundamental upward trend" for bank stocks, said Gail M. Rogers, managing director at J.P. Morgan & Co.
But others say the recent volatility may have a sobering effect. Bank mergers have been getting done at increasingly high prices because acquirers expect bank stocks will continue to rise.
The recent movements in stock prices should remind buyers and sellers alike that stock prices don't always behave as they have in recent years, said M.A. Schapiro & Co. managing director Richard J. Kelly.
"If I were a buyer (of another bank), the recent fluctuations would remind me that I should wonder if these stocks will hold their value," Mr. Kelly said. "I'd say with certainty that they will not."
Still, some analysts asserted that the market's recent volatility may be aggravated by the simple fact that in late summer many investors are on vacation.
David Berry, director of research at Keefe, Bruyette & Woods, observed that traders are finding it is taking up to four orders to sell 5,000 shares of highly liquid Chase Manhattan Corp. stock. Arranging so many orders for a single stock can play havoc with share prices, he said. u