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Brokerages Defy Gravity

Brokerage stocks are acting irrationally.

Despite an especially weak summer for investment-banking work, and research analysts lowering their third-quarter earnings estimates, shares in most Wall Street firms continue to climb.

Over the past month, shares of Goldman Sachs (GS - Get Report) have jumped more than 9%. Lehman Brothers (LEH) shares are up more than 10.6%, Morgan Stanley shares are up more than 9.3%, and Merrill Lynch (MER) is up over 11.4%. The Amex Securities Broker Dealer Index, an average measure of the performance of brokerage stocks, is up nearly 10%.

"The stock tends to move with the markets and interest rate changes, more than it moves with earnings fundamentals," says Dick Bove, a Punk Zeigel analyst, commenting in a recent research report on shares of Lehman. "Therefore, even though the earnings outlook may have deteriorated, the market may not care."

Bank stocks are often thought of as a safe investment, particularly when the Federal Reserve is keeping interest rates stable or paring them back. In theory, any pause by the Fed in raising interest rates should be good for banks, because it might lead to a widening of the gap between short- and long-term interest rates.

But some say that conventional wisdom may not play out this year. Some worry that after the much-anticipated pause, the next move by the Fed could be to start reducing rates -- an event that could be a harbinger of economic weakness .
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Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

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