Judging by history, the recent slide in bank stocks may be nearing an end. Financial shares, after falling nearly 6% the past month, were trading higher Friday. In late morning action, the Philadelphia KBW Bank Index rose 1.2%, outpacing the gains in the broader market. Some of the day's biggest gainers were Wells Fargo ( WFC), up $1.09, or 2%, to $56.03; Regions Financial ( RF), up $1, or 2.9%, to $35.19; North Fork Bank ( NFB), up 59 cents, or 1.5%, to $38.14; Fifth Third ( FITB), up $1.35, or 2.5%, to $54.82; and Bank of New York ( BK), up 63 cents, or 2%, to $31.33. To the bears, the rally may be nothing more than a dead-cat bounce before fear of rising interest rates sends investors racing again to the exits. But others, looking at the recent past, see reason to believe the selling pressure could be over -- or at least nearing an end. Mark Fitzgibbon, a Sandler O'Neill & Partners bank analyst, says that compared with 1998, when bank stocks fell 35% over a seven-month stretch, the banking sector today is in a lot better shape. He says bank balance sheets are better positioned to adjust for rate hikes, and the sector trades at a far lower multiple than it did in 1998. Back in 1998, Fitzgibbon says, the median forward price-earning ratio for bank stocks was 18.3, compared with a 15.4 forward P/E as of March 31. That should cushion the sector this time around, he says. "This is significant, in our view," says Fitzgibbon, in a research note. "Since we were starting from a 16% discount to where we started in the spring of 1998, we think that means we do not have as far to fall." Assuming the past is prologue, bank stocks, in a worst-case scenario, could fall another 14% in order to match the 1998 slump.
But Fitzgibbon thinks a slide of such a magnitude is unlikely because the overall financial outlook is a lot healthier than it was in 1998. Back then, banks stocks sold off over concern about a worsening economic crisis in Russia and the collapse of the Long Term Capital Management hedge fund. Today's market is not facing similar economic concerns, even though the war in Iraq and the threat of terrorism lurk in the background. Of course, there's another big difference between 1998 and today, the monetary posture of the Federal Reserve. In 1998, the Fed, in response to those crises, was cutting rates. In the fall of 1998, the Fed cut interest rates three times, as the fed funds rate fell from 5.25% to 4.75%. For the past three years, the Fed has been slashing rates. At the moment, the fed funds rate is sitting at 1%, a historically low level. But many market watchers now expect rates to begin moving up, as the Fed must confront the prospect of a resurgence of inflation. Indeed, these same people say a more apt comparison for bank stocks isn't 1998, but 1994. That year, the Fed raised rates six times, bumping up the fed funds rate from 3.25% to 5.5%. The Bank Index, on a split-adjusted level, fell 8%, in 1994. That's more evidence the recent slide in bank stocks might have run its course.