Bank investors ushered in the new year on an optimistic note.
Citigroup Inc. was one of the sector's strongest gainers, rising 6.4%. The Treasury Department outlined a program Friday to insure the illiquid assets of certain financial institutions. In late November the Treasury announced that it would backstop $5 billion of Citi assets and provide it $20 billion of additional capital, which the New York company received Dec. 31.
The Treasury also said Friday that the program might also be used to back investments in other companies, though sparingly.
Citi would not discuss the program.
The banking sector held its own in face of anemic data and lingering fears of a prolonged slump. The KBW Bank Index rose 1.9% Friday after finishing 2008 with a 3.2% gain Wednesday. (It shed nearly 50% of its value for the year.)
The Dow Jones industrial average rose 2.9%, and the Standard & Poor's 500 gained 3.2%, even though Institute for Supply Management said Friday that its manufacturing activity index sank to a 28-year low of 32.4 last month. A reading below 50 indicates contraction. The average estimate of economists polled by Thomson Reuters had called for a December index of 35.5.
But traders said investors have already factored into the market the expectation of dismal economic news.
"I don't think the manufacturing report spooked anyone," Patricia Pines, a bank stock trader at FIG Partners LLC. "I think what we got was a modest new-year rally, with people trying to close the door on 2008 with a little bit of optimism."
Friday's gainers included large-cap companies that closed big deals. Bank of America Corp., which closed its deal to buy Merrill Lynch & Co. Inc., rose 1.8%. So did Wells Fargo & Co., which closed its deal for Wachovia Corp.
City National Corp. shed 1.9%. The Los Angeles Times reported Friday that the Treasury is investigating why the Beverly Hills company received a $400 million taxpayer infusion last year. The inquiry "is not based on any suspected wrongdoing by City National," the paper said. "Instead, investigators see the review as a case study into how the Treasury Department is implementing its controversial program to infuse $250 billion into the nation's banking system."
Observers said the report might have ignited concern on Wall Street that the government would require City National to return the money, but several analysts later said such concerns were unfounded.
Neither City National nor Treasury officials immediately responded to interview requests Friday.
Synovus Financial Corp. fell 1.2%. The Columbus, Ga., company said it expects to report that its fourth-quarter loan-loss provision nearly quintupled from a year earlier, to $250 million. It also expects to report a chargeoff ratio of 2.2%, mostly because of problems in the residential real estate market.
Synovus is scheduled to issue its fourth-quarter report Jan. 22.
Ms. Pines of FIG said that trading was exceptionally light Friday, and that slow trading days rarely show which direction the market will take over the next week.
"I think when everybody gets back to work on Monday, we'll get a real sense of where things are going early this year," she said.
Many analysts expect bank stocks to remain depressed during the early part of this year.
"For the industry as a whole, right now things are still very tough," said Steve Brown, the chairman of Banc Investment Group LLC in San Francisco. "I have my fingers crossed for improvement in the second half of '09."