Banking stocks rallied to close out the week, spurred by promising economic data.
The Labor Department's report on Friday of a stable unemployment rate reinforced indications that the Fed will decide against raising interest rates when it meets this month. Labor statistics might not provide the most significant details for the Federal Reserve, analysts said, but the latest numbers might have eased concerns over a strong 5.2% growth in the gross domestic product in the second quarter, and a 0.5% rise in personal spending in June.
"The market anticipates a steady stream of evidence that the Fed will not tighten the interest rates in August," said Richard McCabe, the chief market analyst at Merrill Lynch & Co. "And in the eyes of investors, interest rates are still considered important," even if a rise might not hurt banks as much anymore.
Nancy Bush, an analyst at Prudential Securities Inc., said undervalued banks such as FleetBoston Financial, which rallied $2.375, or 6.29% to $40.125 on Friday, will see better share prices soon. She also said share prices may rise for two that are not undervalued: Northern Trust Co. and State Street Corp. Northern closed at $79.4375, up $2.0625, or 2.67%, and State Street rose $4.8125, or 4.51%, to $111.625.
Banking stocks will continue to do well over the summer and into the fall as long as the Federal Reserve Bank can "engineer a soft landing," Ms. Bush said. However, she said any increase in interest rates at this time could worsen fears of a recession and in turn "influence concerns about credit quality, and bank stocks will get hurt."
Also on Friday, Juneja Vivek of J. P. Morgan & Co. upgraded her rating for Washington Mutual Inc. to a "buy" from "market perform." Washington Mutual picked up 50 cents, or 1.43%, closing at $35.50.
The American Banker index of the top 50 banks increased 4.14% and its index of 225 banks rose 4.06%.
Sung Won Sohn, senior vice president and chief economist at Wells Fargo & Co. in San Francisco, warned that the positive momentum could be short-sighted. "The market will look at it (the labor market data) as a box with a nice packing," said but the contents may not be as nice a present as the market thinks. "Recent indicators," Mr. Sohn concluded, "point to a pause rather than a slow down," which could give the Federal Reserve reason for another quarter point hike later this month.
Richard S. Bookbinder, managing member of Bookbinder Capital Management, a hedge fund management firm, said that the Federal Reserve will not look at inflation or unemployment but at stock prices when making a decision about interest rates and, considering last week's performance of the market, the result could well be a 0.25% hike.
"I don't know whether a raise of rates is needed," he said, "but the economy is not cooling down much. After six hikes, we are just about to see some of the impact," and the Federal Reserve could come to the conclusion that a final increase could do the trick.
Mr. Bookbinder said the market for bank stocks could see greater price improvement among the "household names" but is skeptical whether this is "the time to jump into the banking sector." He said banks have to focus more on asset quality, product innovation, and fee-generating income.