rebounding sharply off deep lows on a dramatic turnaround of investor sentiment.
"The group's high-beta reputation was justified last month," said global bank analyst Raphael Soifer of Brown Brothers, Harriman & Co. in New York, referring to Wall Street's gauge of stock price volatility.
Indeed it was. While the broad-market Standard & Poor's 500 stock index advanced 6.25% last month, the nation's 50 largest bank stocks jumped almost 17%, and the American Banker index of 225 bank stocks soared more than 19%.
Among individual companies, Citigroup Inc. shot up 23.3% -- more than $10 per share -- to a record close; Chase Manhattan Corp. rose 15.7%, and J.P. Morgan & Co. gained 14.5%.
A pair of badly battered superregional banking companies also posted big gains. Shares of First Union Corp. were up 20%; those of Bank One Corp. rose 12.4%.
"The banks weren't along for the ride -- they were the ride," said analyst Michael A. Plodwick of Lehman Brothers Inc. in New York. "No fundamentals changed, but the stocks were in a very oversold position when investor psychology changed" during the two weeks that banking companies were reporting third-quarter earnings.
As earnings reports first appeared, "the reaction even to good results from good banks like Firstar and SunTrust Banks was, 'Yes, but it doesn't matter,' " he said. But the next week brought good results from the biggest banks, plus good economic reports and then a breakthrough on financial reform. "Suddenly some people stepped back and decided things weren't so bad."
The flip-flop in investor psychology was sharp and sudden. Mr. Plodwick said: "One week I had (fund managers) calling me saying, 'What should I sell? I've got redemptions.' The next week, they called back to say, 'I can't miss this. What should I buy?' The shift in sentiment was enormous."
As the Lehman analyst sees it, bank stock valuations are now "back where they should have been," and this should mean the emphasis will return to individual company earnings stories. "As we have been, we will be looking toward the companies with top-line growth," Mr. Plodwick said.
Mr. Soifer of Brown Brothers said he thinks some stocks were left behind in the rally. Shares of J.P. Morgan, Lehman Brothers, Merrill Lynch & Co., and Donaldson Lufkin & Jenrette Securities Corp., he said, are below their peers in price versus 1999 earnings and book value.
But Mr. Soifer and other analysts at Brown Brothers still expect a bear market in stocks to unfold next year.
The firm's chief strategist, Charles H. Blood Jr., told clients last Friday that the market's late October rally blunts the risk of "an immediate and precipitous decline in prices." But he said there is "no change in our assessment of the negative longer-term trends."
In technical terms, he said, the recent low point of the overall market "lacked most of the characteristics of a solid low. There was no selling climax, sentiment was not at a bearish extreme, and bond prices did not establish a positive divergence by rallying while stocks declined."
Mr. Blood said he expects stocks in the next few months to trade in a range between their summer highs and October lows as part of the market's "irregular top," which has been "unfolding for many months." The latest rally means that a "severe down leg" in stock prices has been deferred "until the first part of next year."
Meanwhile, Mr. Blood said the recent rally should be viewed as "a rebound within a bear market," and he recommended "that investors use the recovery to further position themselves for a large bear market in the quarters ahead."
