Bank Stocks Well-Placed, Even If Fed Raises Rates, Study Says

By Matthews, Gordon | American Banker, September 9, 1996 | Go to article overview

Bank Stocks Well-Placed, Even If Fed Raises Rates, Study Says


Matthews, Gordon, American Banker


Bank stocks have hit frequent turbulence recently on investor fears that the Federal Reserve will soon be forced to raise interest rates to muffle inflation.

Are those fears justified? Not judged by results from the recent past and not based on the current outlook, according to an analysis by Dain Bosworth Inc., a Minneapolis brokerage firm.

On average, bank and thrift stocks tallied gains on both a six-month and one- year basis after the Fed initiated credit-tightening cycles, although they did underperform other stocks in those periods.

"It seems safe to say that Fed tightening does not necessarily spell disaster for the equity markets, despite investors' current hypersensitivity," wrote bank analysts Ben B. Crabtree and R. Jay Tejera in a report on the industry.

But the analysts emphasized that the markets' keenness to stay abreast of economic developments may have altered the central bank's credit- tightening cycles during the past two decades.

The last three rounds of Fed tightening were shorter than earlier bouts, they pointed out. That may have been because the markets' reaction - especially that of the bond market - helped "bring about the desired economic response more quickly than in the distant past."

Still, Fed credit tightenings have a lagging impact on business conditions, they noted. The period required for such moves to jolt the economy and whether it has changed during the past 20 years are debated by economists.

Banks suffered their worst market setbacks in the stagflationary 1970s. After the Fed began tightening credit in early 1977, banks posted a six-month return of minus-13%, twice as bad as the minus-6.5% return for the Standard & Poor's 500 stock index during the same period.

Banks also underperformed the market for the full year after the 1977 Fed tightening, losing 14.9% while the market slipped 11.5%. Thrifts, on the other hand, posted a six-month gain of 2. …

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