Bank stocks steamrolled into record territory Friday as a lower-than- expected employment report added fuel to a booming bond market.
The Standard & Poor's index of major banks reached an all-time high on the strength of its largest one-day unit increase in history.
For the day, the index was up 3.37%, and was up 6.2% for the week. By comparison, the S&P rose 1.92% for the day, and 4.2% for the week.
The yield on the 30-year Treasury bond fell 11 basis points in midday trading, to 7.74%, and since Tuesday has fallen 36 basis points.
Much of the markets' rise was sparked by the government's report that July employment figures were lower than expected.
Since February, these monthly reports have often come in far higher than expected, spurring inflation fears.
But Friday's well-received news came on the heels of other economic indicators released last week, such as July payrolls, which showed scant signs of inflation.
"These reports are really taking the pressure off the Federal Reserve to raise interest rates," said Anthony Davis of Dean Witter Reynolds Inc.
"And bank stocks, which the market views as interest-rate sensitive, are responding wonderfully," he added.
When inflation fears subside, the value of bonds increases, and their yields, which move in the opposite direction, fall.
Investors view banks, with their large deposits and bond portfolios, as sensitive to the direction of interest rates. As a result, bank stocks commonly move higher when bond prices rise.
Those banks with stocks that are highly liquid and that operate large trading units perform notably well amid falling bond prices.
Such banks fared especially well on Friday. First Chicago/NBD Corp. surged 6.75%, to $41.50; Citicorp rose $3.875 to $87.125; BankAmerica Corp. was up $2.75, to $84.25; and Chase Manhattan Corp. rose $3, to $74.125.
Other economic news that lifted the market included a government report that the economy gained 193,000 jobs in July, 10,000 less than forecast. The government also reported that unemployment had risen to 5.4%, off its six year low of 5.3%.
The stabilizing economy is a perfect environment for banks, said David Berry, director of research at Keefe, Bruyette Woods Inc.
"Its a Goldilocks economy - not too hot and not too cold," he said. "Credit mistakes are high in an inflationary economy, but the propensity of banks to make lending errors is less with lower inflation."
Observers, including Dean Witter's Mr. Davis, say banks are not as sensitive to interest rates as they once were. Through balance-sheet management, banks have neutralized to a large degree the effect of wild gyrations in rates.
Bank fundamentals are driven not by rates but by consolidation and technology gains, he said. These are the factors that should drive stocks higher for the group, he concluded.
Nonetheless, bank investors still react from day-to-day to interest rates, he said.
"You still get a knee-jerk, Pavlovian response one way or another," he said.
The S&P bank index gained 12.45 points, to close at 381.98, besting the previous record by 2.30 points. Still, in percent terms, Friday's increase was not even among the index's top 10 gains.
Other large gainers Friday were Boatmen's Bancshares, which rose $2.75, to $43; NationsBank Corp., which rose $2.625, to $88.625; Barnett Banks Inc., which rose $1.625, to $63.50; and J.P. Morgan & Co., which rose $2.625, to $89.125.
