Bank stocks rallied impressively Friday on fresh evidence of a slowing economy.
The Standard & Poor's bank index soared past the 400 mark for the first time, closing up 1.57%% at 401.22, after the Labor Department reported that consumer prices rose only 0.1% in August. It was about half the increase economists expected.
Adding to investors' confidence, the Commerce Department reported that retail sales, excluding automobiles, rose 0.2% in August. The figures were well below the 0.4% to 0.5% rise forecast by analysts.
The Dow Jones industrial average also set a new high - its second in a row - climbing 5838.52 to 5771.94. The S&P 500 and Nasdaq bank index also posted gains.
The economic reports quelled concern that inflationary pressures were certain to prompt the Federal Open Market Committee to ratchet up interest rates at its Sept. 24 meeting.
Earlier economic reports - including one that said unemployment has slipped to 5.1% - had fanned fears that rates would climb 25 to 50 basis points.
High-profile New York banks were among the big gainers for the day. Citicorp shares rose $88.50 to $2.25 while Chase Manhattan Corp. shares surged $1 to $79.375.
Among regionals, Bank of Boston Corp. was up $1.375 to $55.50, as news leaked that Brown Brothers Harriman & Co. planned to upgrade the stock to "buy," based on its attractiveness as a takeover target.
Republic Bank was up 75 cents to $69.125. And Norwest Corp. gained $1.375 to $40.625.
Some analysts warned that the market's euphoria about rates could end as quickly as it began and that a correction might be in store for the high-flying bank issues.
Analyst Robert Albertson of Goldman Sachs and Co. warned investors to be "cautious and selective" about bank stocks because of a looming market correction.
"This rally is unsubstantiated because the fundamentals are not going the right way," he said. "I don't expect to be raising my estimates soon."
Mr. Albertson includes Citicorp among his picks because it has "strong raw earnings potential."
Money centers tend to be the stronger group because of their focus on the corporate finance business, Mr. Albertson explained. Banks with a strong marketing edge in technology, such as Banc One Corp. and Norwest, also have an edge, he added.
Michael Mayo of Lehman Brothers Inc. predicted that banks will receive another boost when third-quarter earnings come in.
"Most banks will meet or exceed their expectations," said Mr. Mayo. "But in some other industries, companies are already saying that they won't make the numbers."
Economist Scott Brown of Raymond James & Associates in St. Petersburg, Fla., said that while the economic "numbers were good," the market overreacted. "I still expect intermediate and long-term rates to rise."
Other analysts expressed doubt that banks can sustain the momentum into the final quarter of the year.
Analyst Judah Kraushaar of Merrill Lynch & Co. said banks stocks were already moving into the overvalued territory.
"Historically banks stock oscillate between a period of undervaluation and overvaluation," he said, asserting that bank stocks are moving into the latter category.
Mr. Kraushaar also said that deteriorating credit quality will continue to plague banks in the second half of the year.
He recommends banks such as Citicorp and Chase, which focused aggressively on restructuring, or banks developing specialized lines of business such as Republic Bank, which has invested in private banking.