Bank stocks fell more than 3.6% on Monday, buckling under fresh economic news of rising home sales in July and possibly higher interest rates as a result.
The Commerce Department reported that new-home sales in July rose 0.1% to a seasonally adjusted annual rate of 980,000 units. This was stronger than the 2.6% drop expected by a consensus of economists. Also taking economists by surprise was an upward revision of June home sales, to a yearly rate of 979,000 units, up 7.3% from May.
The news sent most stocks south, with financial equities losing the most. All of the 31 banks on the Standard & Poor's bank stock index fell, driving the group down 23.25 points, or 3.6%, to 619.81.
That compared with the Dow Jones industrial average's drop of 176.04 points, or 1.6%, to 10,914.13, and the Nasdaq's fall of 46.3 points, or 1.7%, to 2,712.6.
Among the biggest decliners were State Street Corp., down $4.125,to $59.375, or 6.5%; Bank of America Corp. $3.6875 to $60.0625, off 5.8%; Wells Fargo & Co. $1.5625, to $40.25, off 3.8%; and U.S. Bancorp $1.625 to $30.6875, or 5%.
The housing numbers are "a vivid sign of the underlying strength of the economy and consumer spending, said James Coons, chief economist at Huntington Bancshares in Columbus, Ohio. But "I don't view any of that justifying the overall slaughter in bank stocks."
Once again, investors fled for the exits, anticipating that the Federal Reserve would raise interest rates down the road, despite last week's 25-basis-point increase in the federal funds and discount rates. Monday's news came on the heels of a speech Friday by Fed Chairman Alan Greenspan in which he indicated that, if stock prices continued to soar, the central bank might take remedial action.
"This reminds me of the Godzilla movies," said Kenneth T. Mayland, chief economist for KeyCorp in Cleveland. "No matter how much you shoot at it, it keeps coming back."
Investors will be looking at the national purchasing managers survey Wednesday and at Friday's report on August employment, Mr. Mayland said. He said he expects these numbers to supply more evidence of impending inflation.
"By the end of this week the juices could be flowing again for another rate hike at the Oct. 5 meeting" of the Fed policymaking committee, he said.
Mr. Greenspan's comments "sounded a little cautious to many folks and suggested that raising short-term interest rates to slow the market's ascent is a possibility," said Gerard Cassidy, an analyst at Tucker Anthony Cleary Gull in Portland, Maine.
In addition, Bank One Corp.'s downward revision of its 1999 earnings estimate last week has "cast a dark cloud over the group" of bank stocks, Mr. Cassidy said.
Taking a contrarian view, however, Mr. Cassidy suggested that bank stocks now might be a bargain. "History has proven this is the time to buy bank stocks in a rising-rate environment because rates will stop going up after some time," he said. Once the change "permeates the market," bank stocks will advance.