Stocks: Bank Stocks Soar on Sign Economy's Cooling Off

Bank stocks staged their biggest rally in two months on Friday after a weak employment report squelched inflation fears among investors and sharply reduced the prospect of higher interest rates.

Wall Street analysts and economists were surprised when the Labor Department reported that the nation's nonfarm employment dropped 40,000 during September. It was the strongest sign yet that the economy is cooling off.

The investment community had expected a rise in payrolls - perhaps as high as 175,000 - but virtually no one expected a fall after the 241,000 gain in August that sparked inflation fears.

The credit markets rallied immediately on the news, with bond prices jumping up and yields declining. The stock market soon followed, led upward by bank stocks.

The Standard & Poor's bank index rose an impressive 1.44% - the biggest one-day gain since a 3.25% increase on Aug. 2, when stocks rallied on a relatively weaker-than-expected report from the National Association of Purchasing Managers.

Meanwhile, the Nasdaq bank index, which includes many major thrifts, posted a Friday gain of 0.31%. The Dow Jones industrial average rose 1.01% and the S&P 500 appreciated 1.25%.

Large capitalization bank stocks were the day's biggest gainers . They included Mellon Bank Corp., which climbed $3.875 to $64.625, Bank of Boston Corp., up $1.875 to $59.875; BankAmerica Corp., up $1.75 to $86.25; SunTrust Banks Inc., up $1.125 to $42.75 and Bankers Trust New York Corp., up $1.875 to $81.75.

Bank analyst Kenneth F. Puglisi of Sandler O'Neill and Partners in New York, noted that smaller banks lagged behind both the market and the bigger banks because the rally was an "interest rate-driven rally," focusing on liquidity.

In spite of the substantial run up in stock prices, however, trading volume in the bank stocks "was not unusually high," said analyst Michael L. Mayo of Lehman Brothers Inc. He noted that profit taking moves often are seen in earnings reporting periods. "But if some stocks sell off, it is likely that it will not be the result of deteriorating fundamentals," he said.

Equity market strategist Abby Joseph Cohen of Goldman, Sachs & Co., New York, said the powerful rally is a precedent for 1997. "We see a modest uptick in inflation and profits continuing to grow," she said.

Analyst Katrina Blecher of Gruntal & Co. was somewhat cautious about the rally. The rally signals that investors are confident about a continuing low interest rate environment, but bank stocks tend to retreat during earnings season, she said.

"There will be some disappointment in earnings, particularly among the banks in the Middle Atlantic and New England region because of sluggish loan growth," she said. "Credit quality will continue to garner attention."

Last week was memorable for finance company stocks. During Friday's trading, the Money Store was up 23.6% for the past five days; IMC Mortgage Co., 19.9%; Aames Financial Corp, 18.2%, and Ocwen Financial Corp., 13.8%.

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