Bank stocks could be sailing into choppy waters this week as investors turn their attention from earnings and back to the prospect of higher interest rates.
Bank shares' volatile week ended with a rally on Thursday:The American Banker index of the 50 largest banks rose 1.49% and its index of 225 bank stocks rose 1.37%.
Gainers included Wachovia Corp., up $2, or 3.14%, to $65.625; State Street Corp., up $2.3125, or 2.47%, to $95.9375; and Mellon Financial Corp., up $1.125, or 3.54%, to $32.9375.
But "fairly negative catalysts lie ahead," said Frank Barkocy, senior analyst at Keefe Managers in New York. "If we see continued strength in the economy manifested in the gross domestic product and consumer price index numbers, it is conceivable that the Fed will take more dramatic action and raise interest rates more than 25 basis points."
Federal Reserve policymakers have raised interest rates five times in 25-basis-point increments since last summer and are widely expected to do so again at their next meeting, May 16th.
"Investors may want to take some gains off of the table and be cautious this week," Mr. Barkocy said.
Nancy Bush, an analyst at Prudential Securities, agreed. Even though earnings for the group were solid, she said, investors' preoccupation with higher interest rates will continue to depress share prices. Higher interest rates put several banks' margins under pressure in the first quarter.
"It is going to be bumpy for bank stocks until the Federal Reserve meeting," Ms. Bush said. Last week "we had incredibly bad days and incredibly good days. In the end people were standing around saying, 'What is going on?' There is no strong sense of conviction for the market."
Though bank stocks rallied on Thursday, they failed to recoup the losses from the previous Friday.
Others were more optimistic.
"Bank stocks were penalized when technology stocks went down, but they have not benefited from the recovery," said James Ellman senior vice president and senior portfolio manager at Merrill Lynch Asset Management. But he added, "If we are back to a bull market, then financial stocks will test their old highs."
One reason bank stocks have not recovered as well as technology stocks is that the two attract such different investor types.
"The average bank stock investor is someone who expects cyclicality and believes that everything that could go wrong will," said Mr. Ellman. More than a week ago, "both kinds of investors thought we were in a bear market," he said. "Technology investors say that we are back to normal, but bank stock investors are still hiding under a rock."
Warburg Dillon Read officially announced Thursday that it has hired Diane Glossman, Michael Plodwick, Robert Patten, and Ken Usdin away from Lehman Brothers to build up its bank research department. Ms. Glossman is filling the post previously held by Thomas H. Hanley.
Ms. Glossman, a highly ranked analyst, has been appointed to head U.S. bank and e-finance research. Mr. Plodwick will cover multinational banks, Mr. Patten will cover superregionals, and Mr. Usdin will help Ms. Glossman with e-finance.