Bank stocks revive; summer rally in offing?

Bank stocks shrugged off several days of profit-taking doldrums and resumed their climb Friday, heightening hopes for a summer rally.

In the 30 days through last Thursday, the American Banker index of 225 banks improved 6.34% versus a 2.65% gain for the Dow Jones industrial average.

The rally was apparently sparked May 17 by the Federal Reserve Board's last move to raise short-term interest rates, a bid by the central bank to rein in the economy's growth the head off inflation.

Boost from Producer Prices

The rally regained momentum after the Labor Department's producer price index for May, released Friday morning, surprised economists with its second decline in a row.

For analyst Frank J. Barkocy, the activity Friday affirmed his positive view of the bank sector.

"With economic growth not likely to be as significant as some investors previously expected, a lot of action was taken out of the cyclical stocks," said Mr. Barkocy, senior vice president of Advest Inc.

In place of industrial companies customarily favored when the economy is expanding, stock buyers have shifted their focus back to financial issues, and particularly to banks, he said.

A chief factor was banks' rapid response to the Fed's May 17 rate increase.

Within several hours, banks had matched the central bank's half-point rise in the discount rate the similar boosting of the federal funds rate.

That seemingly persuaded investors that banks could sustain the earnings momentum apparent in the industry's generally strong first-quarter financial results.

"Overall, it has been a good climate for financial institions," Mr. Barkocy said, "and I don't see why the trend can't continue in the coming weeks, with a little profit taking from time to time."

"I would use any weakness due to profit taking as a buying opportunity," he said. "The banks have been a good place to be and will continue to be in this environment."

May's 0.1% drop in the producer price index indicated goods were that much cheaper during the manufacturing and delivery stages, before reaching the customer. Wall Street economists had expected the May index to rise 0.2%.

Wall Street interpreted the report as a sign that inflation is quiescent while the economy settles back to a slower growth rate.

Some analysts take a less sanguine outlook, expecting a fallow period for bank stocks in the near term and a mixed performance if rates rise again.

'An Awfully Good Month'

"The reality is that the last month has been an awfully good month for bank stocks," said Lawrence W. Cohn of PaineWebber Group Inc. "They have been doing very well relative to the market, and it may be time for a rest.

"A lot of institutional shareholders are concerned that the [bank] group has done so well lately," he said. "It's been a difficult market for these investors."

Mr. Cohn argued that now is the time these investors will try to nail down profits. "Nobody wants to stick around very long in this kind of environment," he said.

"The expectation is that the Fed will tighten again," he added. "That may not happen right away, but it's more likely to be within three months than six months."

If rates go up, it reduces the value of financial assets, and that could hurt bank stocks, Mr. Cohn said. "So the question is, how big a window exists for bank stocks to do well?"

FRIDAY'S MARKET

The best performer among banks was Banc One Corp., up $1.25 a share, to close at $36.375 after Donaldson, Lufkin & Jenrette Securities Corp. added it to a list of recommended stocks.

Bank of Boston Corp. -- dropped from the Donaldson Lufkin list and downrated from "buy" to "very attractive" -- fell 75 cents a share, to $27.

Also chalking up gains were First Interstate Bancorp, $1.75, to $80; Signet Banking Corp., $1, to $42.50; and State Street Boston Corp., $1.125, to $42.875.

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