Financial stocks, including the market-battered future merger partners J.P. Morgan & Co. and Chase Manhattan Corp., rallied on Friday, with J.P. Morgan up 8.79%, as economic data indicated a further slowdown in the U.S. economy.
The data were particularly welcome because the news came without substantial weakening in the private sector, economists said.
The American Banker index of the top 50 banks was up 2.77%; the index of the top 225 banks was up 3.01%. The Standard & Poors 500 index rose 1.11%.
J.P. Morgan closed at $158.50, and Chase was up 6.72%, closing at $42.6875. Other gainers in the financial services sector included PNC Financial, up $2.625, or 4.23%, to $64.625, and Union Planters, up $1.3125, or 4.17%, to $32.75. Among investment banks Merrill Lynch & Co. rose $4.5125, or 7.01%, to $65.8125; Lehman Brothers Inc. $4.75, or 8.3%, to $62; and A.G. Edwards & Sons Inc. $1.375, or 2.92%, to $48.4375.
Even troubled Finova Group Inc. benefited for a while, anyway in Fridays market upswing, rising to $2.6525, as of 12:15 p.m. However, the stock fell to $2.375 at the close of the market.
Moodys Investor Service had downgraded the senior debt of Finova Capital Corp., a subsidiary of Finova, to B1 from Ba1, on Thursday because of the deterioration of the franchise. Standard & Poors had excluded Finova from its MidCap 400 index, sending the banks valuation lower. Finovas stock shed 17% on Thursday, after dropping from $31.9375 on March 31, when the stock began to sink.
Analysts expect Finova to report earnings of 53 cents a share, according to Thomson Financial/First Call, but delayed its earnings release until November 14. Finova is troubled by asset quality problems and the resignation in March of chief executive officer Sam Eichenfield.
Underlying the gravity of the situation, Moodys echoed our concern that [Finova] could be forced into restructuring its debt if it doesnt come up with a last-minute buyer, wrote Kathy Shanley of Gimme Credit Publications Inc. in Wilmette, Ill., in a research note.
The rally was driven by the Commerce Departments report that third-quarter growth in GDP had slowed to an annual rate of 2.7%.
At the same time, though consumer spending rose 1.4% against its second-quarter pace, new home construction declined by 9.2% in the same period, after increasing 1.3% annualized in the second quarter. Government spending declined by 3.6%.
The Commerce Department also reported that new orders for durable goods increased by 1.8% in September, following a 3.5% gain in August.
The good news is not that the economy is slowing, said David Kelley, senior economist at Putnam Investments, but that we have strong growth without inflation.
Mr. Kelley said that the recent numbers could not reflect anything but the coming of the much-hoped-for soft landing. Under other circumstances 4.1% growth in the private sector would be described as a boom, he said, and insisted that a recession is not in sight. This is where the Fed wants us to be.
Wayne M. Ayers, chief economist at FleetBoston Financial, echoed this positive notion but was less optimistic about the markets continuing to rise. The best news about inflation is behind us, he said.