Bolstered by the continuing decline in oil prices, bank stocks had their second consecutive day of strong results.
The KBW Bank Index closed up 1.5% Wednesday, after gaining 2.9% on Tuesday.
Oil prices closed down nearly $6 a barrel Tuesday after Hurricane Gustav caused less damage to oil production than feared, and the slide continued Wednesday.
Oil lost 36 cents a barrel Wednesday and is down 7% in the past four days. Investors have cheered the fall in oil prices, hoping that it gasoline prices will fall substantially and, as a result, leave more money in consumers' pockets for discretionary spending and to pay off debt.
"The equity market, like a dog on a leash, is really taking its cue from oil," Jack Ablin, the chief investment officer at Bank of Montreal's Harris Private Bank, said in an interview Wednesday.
Better-than-expected economic news also gave some investors reason for optimism, traders said. The Commerce Department said Wednesday morning that July orders for manufactured goods rose 1.3% from the previous month — exceeding the 0.9% that economists, on average, had predicted, according to Dow Jones. Factory orders rose 2.1% in June.
"It was a positive in early trading," Michael Nasto, senior trader at U.S. Global Investors Inc., said in an interview Wednesday.
Notable gainers included SunTrust Banks Inc., 3.3%; Sterling Financial Corp. in Spokane, 10.2%; and Taylor Capital Group Inc. in Chicago, 15%.
A deal in Indiana sent a pair of bank stocks in opposite directions. First Merchants Corp. in Muncie, Ind., said it had agreed to buy the $890 million-asset Lincoln Bancorp in Plainfield to augment its metropolitan Indianapolis operation. The deal, valued at $74 million to $77 million and expected to close in the fourth quarter, would give First Merchants 17 branches in the Indianapolis area.
Lincoln's shares soared 35%, but First Merchants' fell 0.15%.
For the broader market, meanwhile, further weakness in the auto industry overshadowed fuel-cost relief.
The Dow Jones industrial average — hampered by Ford Motor Co.'s reporting a 27% drop in sales last month, General Motors a 20% dip, and Toyota Motor Corp. a 9.4% fall — traded in the red much of the day but scrounged out a 0.14% gain by the close. The Standard & Poor's 500 index finished off 0.2%.
The Federal Reserve's periodic beige book report, an anecdotal reading on the economy, slowed trading momentum in the afternoon. The Fed said that "economic activity has been slow" in most parts of the country during the past month. "The beige book certainly didn't help matters," Mr. Nasto said.
What's more, gains in financial stocks were held in check by a stark reminder of the credit crunch that has plagued the banking industry for a year.
GMAC Financial Services said it will shut its 200 GMAC Mortgage offices and reduce the unit's work force by 60%, or 5,000 jobs, in the wake of mounting losses on subprime mortgages. GMAC Financial is 51%-owned by a private-equity firm.
"The financials are about as cheap as they've been," Mr. Ablin said, "but until we can call an end to the credit crisis, I think we'll be waiting for them to sustain solid momentum."