Financial stocks staged a strong rally Thursday as economic data raised confidence that the U.S. economy is heading toward a "soft landing" and merger talk continued to lift some investment banks' shares.

The American Banker index of the top 50 banks rose 2.43%, and its 225-bank index added 2.84%.

Among banks with the largest market capitalization, Bank of America Corp. shares rose $2.6875, or 5.28%, to $53.5625, and Chase Manhattan Corp.'s rose $2.625, or 4.93%, to $55.625.

Getting a lift from merger speculation in the wake of Credit Suisse's deal for Donaldson, Lufkin & Jenrette this week, Lehman Brothers shares gained $4.1875, or 2.97%, to $145, and J.P. Morgan & Co. jumped $15.3125, or 10.08%, to $167.1875. Merrill Lynch was up $3.125, or 2.2%, to $145.25.

Smaller banks also got a share of the action. Union Planters Corp. of Memphis gained 68.75 cents, or 2.32%, to $30.3125 after Sandler O'Neill & Partners initiated coverage with an "outperform" rating by analyst Chris Orgielewicz.

Fueling the rally were government reports that orders placed with U.S. manufacturers fell in July along with the index of leading economic indicators and that the Conference Board's consumer confidence index slipped 1.9 points in August. "The flow of data all point to a soft landing path," said Dr. Kenneth T. Mayland of ClearView Economics LLC. "We are still early in this process, but the odds of the Fed being done have increased. And this is very good for some very cheap financial stocks - including banks."

Analysts said the macroeconomic picture was just one factor. Capital flowing out of the technology sector, and an easing of concerns about asset quality, were prompting investors to move resources into bank stocks.

Adam Lewis, vice president and bank stock trader at Keefe, Bruyette & Woods Inc., pointed out that concerns among investors about asset quality have been delayed as the market has seen no "blowups" so far. And Mark Fitzgibbon, a managing director of research at Sandler O'Neill, said fund managers are willing to overlook credit quality as they get comfortable with the fundamentals of the financial sector. "Money flowing out of technology is looking for a safe haven," and the financial sector provides just that, he said, particularly since the outlook for third-quarter earnings is good.

Richard Bookbinder of Bookbinder Capital agreed that concerns about credit quality have been set aside but said the doubts will revive later this year. "I have asked the question and I will asked it again: Has asset quality been getting better?" he said. "The answer is no."

As the economy appears to be slowing, "momentum players jump on the bandwagon," he said. But he warned that their movement into financials "might soon run out of steam."

Mr. Lewis agreed that people are "euphoric" about financial stocks right now but said that could change. "People overreact quickly," he warned, though he acknowledged the rally could continue as long as financials still trade at a discount to other sectors. "Financials aren't sexy but consistent," he said.

Mr. Fitzgibbon predicted that more money will flow into financials after Labor Day, when portfolio managers are more focused on specific sectors.

Related Content Online (Source: Thomson Investors Network)

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