Bank stocks suffered another nasty fall Monday, but this time there was little company on the way down.
The overall market enjoyed a rebound after Friday's precipitous decline, but the Standard & Poor's bank index, which plummeted nearly 4% Friday, fell again, this time by 0.62%.
The Dow Jones industrial average, which tumbled more than 3% Friday, rose 2.02% Monday.
The persistent weakness in bank stocks in the face of the market turnaround and a rise in bond prices surprised many market pros.
"I am confounded by this performance," said James Schmidt, a bank fund manager who oversees several billion dollars of assets for John Hancock Investment Management.
"There is a lot of short-term selling going on because of the January employment figures," he said. "The larger institutions are being hit hardest because those are the names institutional investors own."
On Friday, employment figures that were far better than expected shocked financial markets, sending bond prices and stocks into freefall.
The bullish economic news indicated only a slim chance for another Federal Reserve interest rate cut, a blow to interest-sensitive stocks like those of banks.
Major money-center stocks fell again Monday, led by Chase Manhattan Corp., down 87.5 cents to $68; Citicorp, down 37.5 cents to $76.875, and BankAmerica Corp., down $1.75 to $71.75.
J.P. Morgan & Co. shares fell 62.5 cents to $80 after Merrill Lynch & Co. downgraded the stock to "neutral," citing higher interest rates' negative impact on the bank.
Since Friday, the outlook on interest rates has changed dramatically, said Dennis Shea of Morgan Stanley & Co. Last week investors believed interest rates would remain stable or fall slightly.
Now they believe the rate on the 30-year Treasury bond could reach or even surpass 7%. On Friday, the yield of the benchmark bond rose to 6.7% from 6.47%. The rate slipped slightly to 6.68% by midday Monday.
Many market observers say the fixation with interest rates and banks is unfair because just last week the main concern was that the credit cycle would turn and the sector would suffer a high level of delinquencies.
The rosy employment number and a strong home sales report released Monday both demonstrate there is little chance of high consumer default rates, Mr. Schmidt said.
Others were not so quick to brush off banks' misfortune.
Banks have outperformed over the last year, likely by too much, said Lawrence Cohn of PaineWebber Inc. This could be the beginning of a market correction for the sector, he said, with Friday's turbulence in the bond market as the spark.
But even Mr. Cohn, a well-known market bear, was shaking his head over the weakness in bank stocks Monday. "There is certainly a heck of a change in the sentiment toward these stocks," he said.
Mellon Bank Corp., which fell more than 9% Friday, regained $1.875 to close at $53.125.
Two credit card specialists hard hit on Friday also recovered. MBNA Corp. rose $1.375 to $29.875 and First USA Corp. climbed $1.375 to $53.875.
Despite the pounding taken by the large banks, analyst George Salem of Gerard Klauer Mattison upgraded his 1997 and 1998 earnings estimates for Chase Manhattan 3% to $8.75 per share and 2.5% to $10 per share respectively.
A Gerard Klauer survey of 21 major corporations indicated they might increase or initiate business with Chase after its merger with Chemical Banking Corp. As a result, Mr. Salem predicted revenues would rise.