Bank stocks dropped sharply Tuesday afternoon after the Federal Reserve announced it has adopted a bias in favor of raising interest rates.
The S&P Bank Index, which had been in positive territory until word of the Fed's thinking came shortly after 2 p.m. ended the day off 0.25% after a precipitous drop in the minutes immediately after the announcement.
It was the first time the Fed signaled a possible future rate move, and the selloff was not as sustained as it would have been had the Fed actually increased rates, analysts said.
"It's more like the Fed has put us on military alert; it's not like we've gone into war," said Carole Berger, a principal in Berger Jackson Capital Management.
In the past, any bias change could only be confirmed when minutes of the meeting were released six weeks later, leaving a lot of time for speculation and uncertainty.
Most analysts expect banks to recover. Indeed, the Dow Jones industrial average and most bank stocks recovered much of the ground they had lost on the announcement by the close of trading.
The selloff "was a knee jerk reaction," said Charles W. Johnson, head equity trader at Blaylock & Partners.
Bank stocks are going to be hurt in the short term, Mr. Johnson said, "but after people have a chance to digest what was decided bank stocks will come back and everything will be fine again."
By adopting a bias while keeping rates steady, the Fed signaled confidence that the economy was not overheated enough to warrant an increase, analysts said.
"It's more like people will be taking a wait and see approach over the next couple of months in anticipation of what the Fed will do at its next meeting," Mr. Johnson said.
He predicted shares would remain in a narrow trading range until then.
"If the next set of inflation numbers are low, the Fed's move toward a bias will be meaningless," because the market will be regulating itself, Ms. Berger said.
If inflation is really picking up, then bank stocks will fall along with the market, Ms. Berger said.
Ms. Berger sees bank stocks performing well over the next few months. "Earnings are strong and the group, although overvalued, presents opportunities," she said.
"I'm not convinced they even needed to move toward a bias," Jeffrey Anderson, executive vice president at Sanwa Bank, said of the Fed action. "This creates downward pressure on bank stocks as investors wonder how quickly (a rate hike) will come."
The way the Fed chose to make its announcement had a tempering affect on the volatility that usually follows its meetings, analysts said.
"I don't see a long term trend developing that signals rising inflation," said Thomas F. Carpenter, chief economist chief economist at ASB Capital Management.
"All the data with respect to wages and employment costs points to inflation heading down on its own," Mr. Carpenter said.
"Historically the Fed's bias has not been a good indicator of actual policy changes," added Bruce Steinberg, chief economist with Merrill Lynch Global Securities. "I'm surprised the Fed actually changed its bias since a significant back up in rates has already occurred."