After suffering their worst setback since autumn 1987, brokerage stocks are staging a comeback.
Oct. 7 appears to have been the nadir for the sector. That day six major brokerages-Bear Stearns Cos., Donaldson, Lufkin & Jenrette Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co., Morgan Stanley Dean Witter & Co., and PaineWebber Group Inc.-established 52-week lows.
Since then, their shares-and those of A.G. Edwards & Sons Inc., which hit its low of $25.12 the next day-have scored dramatic price gains, though none are near the levels they reached before the summer selloff in the stock market.
Analysts said the day-to-day barrage of horror stories about global markets has abated, letting brokerage stocks recover.
"We certainly haven't had any more negative news on the international front," said R. Harold Schroeder, an analyst at Keefe, Bruyette, & Woods Inc. of New York. "That seems to have eased investors' minds."
The recovery accelerated Friday, amid general optimism in the equity market after an unexpectedly strong Commerce Department report on third- quarter domestic economic growth.
By 2 p.m., shares of Merrill Lynch had surged 5.75%, to $59.8125. Though down 45% from its 52-week high of $107.9375 on July 13, it was well above the Oct. 7 low of $37.75.
Morgan Stanley Dean Witter was up 4.08%, to $65.375-compared with $96.875 on July 17 and $38.4375 on Oct. 7; and PaineWebber shares were up 4.96% to $32.0625, compared with its high of $52.625 on Aug. 12.
A.G. Edwards shares were up 4.37% to $34.3125, against a 52-week high of $47.6875 on April 14.
Mr. Schroeder said there may be bumps ahead for the brokerages. "There are several unsettled global economic issues that could easily rear their heads and change investors' perspectives," he said.
Investors are shying away from companies with international exposure and are rewarding those with strong cost controls.
Favorable earnings used to be expected as "a function of size, how global you are, how big, because all those things would insulate you from risk. Well, that's wrong," said Dean Eberling, an analyst at Putnam, Lovell, DeGuardiola & Thornton, also based in New York.
Now profitability is judged by "how tightly you run your business," he said, adding that "strong margins will be rewarded."
Brokerages with heavier retail emphasis have fared better. Charles Schwab's 52-week high of $45.75 came Oct. 19, when other securities firms were still suffering; it was testing that level again Friday.
Strong retail business is buoying some brokerages when other core businesses-investment banking, trading, and mergers and acquisitions-are less certain, analysts said.
That uncertainty is bad news for firms like Donaldson, Lufkin & Jenrette, which have a small retail component and focus on affluent investors.
"The pure investment banks don't have that revenue stream," Mr. Eberling said.
"The investment banking pipeline looks O.K.," he said, "but it too is very uncertain, and trading is going to be very volatile."