Bank issues led a strong rally on Tuesday after economic data on housing starts fueled hopes for an interest rate cut in 1997.
The Commerce department reported that home starts declined 5.1% to an annualized rate of 1.36 million units in October - the biggest dip in since November of last year. Economists were expecting no change.
The news set off a rally in the bond market that lifted interest- sensitive bank stocks more than most. The Standard & Poor's bank index surged 2.09%, while the S&P 500 gained 0.70%. The Nasdaq bank index gained as well, climbing 0.68%.
Bank stock investors are were especially excited by the news because it confirmed that the economy is slowing down, said chief economist Thomas Carpenter of the ASB Capital Management
Industry data from builders and real estate agents has indicated a soft housing sector for the last six months, but government reports were indicating otherwise, Mr. Carpenter said.
The data released Tuesday confirmed that "the downturn will be sustained for many months" and that there is "no chance" that the Federal Reserve will raise rates at its December Federal Open Market Committee meeting, Mr. Carpenter said.
"It also lays the foundation that there will probably be an interest rate reduction in of 25 basis points in 1997."
Banks would benefit next year because funding profits would increase, while funding costs decline, said Mr. Carpenter, a former bank analyst.
"It is possible in nine months to 12 months that the slowdown in bank lending will reverse, because low interest rates will entice borrowers," he said.
Big gainers in Tuesday's trading included Chase Manhattan Corp., up $3 to $92.50, Northern Trust Corp. which rose $3.062 to $74, BankersTrust New York Corp, up $2.125 to $86.125 and BankAmerica Corp., whose shares surged $2 to $98.
BankAmerica's stock was helped by news that the company plans to make a stock option plan available to its 85,000 employees (See story on page 1.)
Analyst Michael Mayo of Lehman Brothers Inc. said the Tuesday rally is a harbinger of things to come, as investors reward the bank sector's stocks with higher price-to-earning ratios.
"Bank continue to outperform the market and we believe it is a playout of P/E expansion in the banking industry," Mr. Mayo said.
The larger banks are more likely to show the biggest gains, Mr. Mayo said, pointing to NationsBank Corp, whose P/E ratio has grown to 12 from 7.5 in two years.
"There is plenty of upside for bank stocks relative to the general market," he added.
In other news, Citicorp shares, which sat out the rally in early trading, shot up after the company announced the board authorized a $4 billion expansion of its share buyback program. The shares rose $1.675 to $106.875.
The authorization by the Board of directors increased the total buyback to $8.5 billion.
The money-center announced plans to repurchase 4.5 million in shares in June 1995, and has repurchased 51 million common shares so far. Citicorp has 470.48 million shares outstanding.
Shares of First Citizens Bancshares, a $1 billion asset bank in Raleigh, N.C., that is seen as one of only three possible takeover targets remaining in the state, surged $4.50 to $77, a new 52-week high.
A bank spokesman said First Citizens has no interest in being acquired, and that he didn't know what caused the run-up in the stock.
