Financial stocks recovered from their choppy post-election downturn on Thursday, and analysts and traders said that a positive economic outlook and stable interest rates could soon create positive momentum for bank shares.

Financials fell briefly with the Dow Jones industrial average and the Standard & Poor’s 500 index Thursday afternoon as evidence was mounting that the race for the presidency could transform into a protracted legal battle. Still, American Banker’s index of 225 banks closed up 0.8%, and its index of the top 50 banks 0.66%. The Nasdaq composite lost 0.97%, the Dow 0.67% and the S&P 500 0.65%. Bear Stearns Cos. got a lift on rumors that Lehman Brothers Holding Inc. was mulling a bid to take it over. Bear Stearns stock rose $1.50, or 2.64%, to $58.3125. Lehman lost $3.0625, or 5.3%, to $54.6875.

“Financials had a good day” said Bruce E. Simmons, head of trading at Sandler O’Neill & Partners. “People really think that the economy is slowing.”

He said that the uncertain outcome of the presidential election could continue to pull the market down but predicted that financials will outperform the rest of the market as the soft landing unfolds.

Helping the mood was a report from the Bureau of Labor Statistics that showed a slowdown in core producer prices during October. The producer price index rose 0.4%, mostly due to a 1.4% increase in energy prices, but the so-called core rate, which excludes foods and energy, declined 0.1%. The overall index had increased 0.9% in September.

“The year-over-year percent changes of core finished goods, core intermediate goods, and core crude goods all showed sustained reduced growth,” said Kenneth T. Mayland, president of ClearView Economics in Pepper Pike, Ohio. “Price pressures outside the energy arena continue to unwind,” he said. He considers that a “testimony to the great success” of the Federal Reserve’s decision to leave the interest rates stable.

Catherine Murray of J.P. Morgan Securities Inc. said that the economy is definitely a more important factor for financial stocks than the outcome of the presidential election. “Given the relatively even split between Republicans and Democrats in Congress,” she wrote in a research note, “we would expect no extreme position on pending legislative issues.” One possible negative outcome from the election, she also wrote, would be developments that leave the Fed less likely to ease interest rates.

Subodh Kumar, chief investment strategist of CIBC World Markets, said that during a period of instability, many investors will find the relative stability and visible income in financials attractive relative to sectors like technology, which is why he expects further movement into financial stocks.

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