Bargain shoppers were out in force Monday, driving up bank and other financial stocks in a broad market rally buoyed by sentiment that the Federal Reserve will not boost interest rates today.
The Standard & Poor's index of 31 banks rose 3.3%, and the Nasdaq index of 721 banks rose 3.4%. The Dow Jones industrial average was up 1.3%.
Like other industry stocks, bank equities benefited from investors' starting to see opportunities.
Many financial stocks that have lost much value this year displayed strong gains on Monday, including Boston's State Street Corp.; First Union Corp. and Bank of America Corp., both of Charlotte, N.C.; and Chicago's Bank One Corp.
"People are looking at those stocks that have been beaten up over the past couple of months and are looking for bargains," said Charles Johnson, head equity trader at Blaylock & Partners in New York.
Bank stocks have taken a licking this year in part from fears of future hikes in interest rates by the Federal Open Market Committee, which holds its October meeting today. Also, banks that have failed to meet Wall Street's expectations have stoked investor malaise. But some investors say the decline has its limits and are wading back into the market.
Bank One and First Union, both down more than 40% from their highs this year, have become so cheap that to some investors buying their stock right now is a no-brainer, said David Allaire, co-adviser for Retirement Planning Co.'s Imperial Bank Fund in Providence, R.I. Bank One gained 81.25 cents Monday, up 2.4%, to $35.25. First Union rose 93.75 cents, or 2.7%, to $36.1875.
"They can't get a date right now to the dance," Mr. Allaire said. "But put a little makeup on them, and they look good."
Stock of Bank One, which disappointed the market in August with an announcement that its 1999 earnings would fall 7% to 8% short of expectations, may have found its nadir, Mr. Allaire said. The bank's stock now trades with a dividend yield of 5.2%.
Similarly, First Union's dividend yield is 4.8%.
"Money markets don't even pay that," Mr. Allaire said. "That gives the stocks some downward protection."
Nevertheless, all bank stocks have been hit hard, with the slightest indication of inflation sending investors running. Even if the Fed comes out with a bias toward not increasing rates, another downturn may be in store if bad economic news hits.
A rally will "probably last 48 hours until someone comes out with another negative number," said David Dreman, chairman and chief investment officer at Dreman Value Management in Jersey City.
Among the biggest gainers were: Chase Manhattan Corp., up $3.6875, or 5%, to $77.3125; Bank of America Corp. $2.0625, or 3.8%, to $57.375; Wells Fargo & Co. $1.625, or 4.1%, to $40.75; National City Corp. $1.125, or 4.2%, to $28.1875; Citigroup Inc. $1.4375, to $44.6875; and State Street $1.375, or 2.1%, to $66.75.
Though interest rate increases could help some banks, investors widely perceive interest rate hikes as a negative for financial stocks.
"The rate moves are bad for sentiment but good for earnings," said Lori Appelbaum, an analyst for Goldman Sachs Group in New York. "Earnings are what ultimately drive the sentiment."
That spells buying opportunity for several strong regional banks, which Ms. Appelbaum regards as low-risk in part because they do not have foreign exposure in terms of trading and year-2000 compliance. Ms. Appelbaum recommended several regionals that have taken hits over the last few months: SunTrust Banks Inc., Wells Fargo, Zions Bancorp, Comerica Inc., SouthTrust Corp., and U.S. Bancorp.