Bank Stocks' Staying Power Tested with Cooling Economy

Last week was a big one for bank stocks, as evidence mounted that the economy is slowing and inflation remains subdued.

Banks, along with technology stocks, headed up a big market rally. The Standard & Poor's bank index advanced nearly 8% for the week, and last Tuesday tallied a record single-day point gain as concerns about renewed inflation and higher interest rates receded.

Indeed, the 10 largest point gains for the S&P banks have all been recorded since last summer, underlining just how strong bank equities have performed over the past year.

One Wall Street analyst on Friday downgraded a series of banks and urged clients to take profits. "We are in the middle of the last rally for banks," said Richard X. Bove of Raymond James & Associates, St. Petersburg, Fla.

"There is nothing wrong with the banking industry," he emphasized. "But our strategy is to sell stocks when they are peaking."

Mr. Bove expects President Clinton to sign a federal budget deal within two to three weeks. "The market may jump 200 points that day, but it will be the end," he said.

Bank investors ought to have their holdings pruned by May 20, the date of the Federal Reserve's next monetary policy meeting, said the analyst, who expects further increases in interest rates.

Mr. Bove cut to "neutral" or "accumulate" the shares of Citicorp, NationsBank Corp., SunTrust Banks Inc., Wachovia Corp., First Tennessee National Corp., and two Florida companies, Seacoast Bank Corp. and Harbor Federal Savings Bank.

He retained "buy" ratings on Barnett Banks Inc., First Union Corp., and two Alabama companies, Regions Financial Corp. and Alabama National Bancorp.

On Friday, significant signs of a cooling economy came into view as the Labor Department reported that job growth decelerated sharply in April. Moreover, March job growth was revised downward.

Payrolls grew by 142,000 in April, which was far under the 210,000 anticipated by most Wall Street economists. New jobs in March are now estimated at 139,000, rather than 175,000.

"Despite the sharp slowdown in job growth, we still expect the Federal Reserve to tighten at the May 20 Federal Open Market Committee meeting, though that is now much less of a sure thing," said Bruce Steinberg, chief economist at Merrill Lynch & Co.

Still, the unemployment rate fell to a surprising 23-year low of 4.9% in April. That will certainly raise some eyebrows among those economists, including Fed members, who see a strong link between falling unemployment and rising inflation.

At the same time, however, early data show slippage in April auto sales, which may signal that consumer spending is slowing. That would strongly bolster the view that the economy has downshifted to a more sustainable growth rate.

"The employment report and the preliminary numbers on auto sales set the tone for the rest of the month," said economist Robert Genetski of Chicago Capital Inc. Coming reports are likely "to show that the economy is slowing significantly from the pace of the first quarter," he said.

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