Bank stocks kept up their strong head of steam on Tuesday after the Federal Reserve opted not to raise interest rates.
The shares dipped briefly on profit taking after the Fed's widely anticipated decision, then firmed up as investors focused on the benefits of low rates for banks.
Chase Manhattan Corp. was up $2.5625, to $144.875; Citicorp $1.50, to $155.50; and J.P. Morgan & Co. $1.125, to $129.6875.
The Standard & Poor's bank index was up 0.82%. The Dow Jones industrial average rose 0.04%, and the S&P 500 advanced 0.33%. The Nasdaq bank index fell 0.11%.
The Fed last raised rates in March 1997, roiling bank stocks. Though banks are less rate-sensitive than in the past, investors still worry that banks' cost of funds will rise faster than yields on their assets.
After news of the Fed's nonaction was announced, traders sold bank shares but then began buying again.
"There was a brief trading selloff when the announcement came," said bank analyst Frank J. Barkocy of Josephthal & Co. "It was a lot of traders betting that the Fed would not take any action, seeing that action verified, then taking profits."
Also boosting bank stocks was news that President Suharto of Indonesia, whose economy has been wracked with financial woes, will eventually step down.
The turmoil in Indonesia and other parts of Asia has rippled through banks stocks because U.S. money-center banks have made considerable loans in those countries.
At the same time, economic woes in Asia actually have helped pacify jitters about the possibility of higher interest rates, which reached a head after The Wall Street Journal reported that the Federal Reserve had a bias toward raising rates.
Bank stocks sold off significantly on that news, a few weeks ago, but as troubles in Asia escalated, anxiety over a rate hike dissipated.
Tuesday's mini-rally in banks was nothing to write home about.
Before the Fed issued its decision, long rumored takeout candidates such as KeyCorp, Fleet Financial Corp., and Wells Fargo & Co. languished in a market that was generally up.
"Most of the stocks have been weak for a couple weeks," said research director Scott Edgar of the Sife Fund, whose biggest position is in Fleet. "There was a lot of anticipation of big deals, and when nothing materialized arbitragers and other investors looking for a quick deal began to look elsewhere."
Richard X. Bove, of Raymond James & Associates, St. Peterburg, Fla. insists that the rally is likely to peter out as "rational investors" begin to pick up that banks are facing serious earnings problems.
"Loan losses are up, while loan-loss reserves are down," said Mr. Bove. "Stock repurchase plans, which help boost the stock price, are out of the picture. Eventually investors will not want to buy on the expectation of a merger. There are already signs of a pullback."
And an interest rate hike still could be in the offing, market experts noted.
"The rates may be unchanged, but it still leaves the question open of what happens at the next meeting," said economist Scott Brown at Raymond James.
"All the risks are still with us," he said. "Inflation hawks at the Fed are nervous about the low unemployment rate and strong pace of growth. We will start running into constraints that will lead to higher inflation."