Bank stocks rocketed higher Thursday as investors bought up undervalued financial shares and pulled out of technology stocks.
The turbocharged rally pushed some bank shares, such as Chase Manhattan Corp. and Northern Trust Corp., to 52-week highs, and extended gains posted on Wednesday by many other financial stocks that had languished near 52-week lows.
The American Banker index of 50 largest banks surged 9.19%, and its index of 225 banks, 13.03%. The Dow Jones industrial average rose 4.93%, and the Nasdaq, which is composed mostly of technology companies, 2.94%
The surge in bank stocks cheered portfolio managers and traders who said that Thursday's rally could be the long-awaited turn in the sector.
"We have seen some head-fakes in the past," said Scott Edgar, director of research at the Sife Trust Fund. "But this rally looks very solid."
The surge in bank stocks also sparked some speculation that the slump in merger and acquisition activity in the sector also could be nearing its end. Deals, at least major ones, have been scarce over the past year because of slouching bank stock prices.
Peter Roth, an investment banker at Fox-Pitt, Kelton, said deals could resume as early as next month: "History shows that when bank prices turn up, the level of merger and acquisition activity increases."
Many bankers also want to do deals before the end of the year, when pooling-of-interests accounting, which has fueled activity for the last several years, comes to an end, Mr. Roth said.
Rodgin Cohen, a partner at Sullivan & Cromwell, was cautious about the recent rally and the impact that it could have on merger activity. "One small swallow does not make a spring make," Mr. Cohen said. "Two days are not going to make a difference in the merger and acquisition activity."
The biggest gainers of the day included Boston-based State Street Corp., which rose $13, or 17.85%, to $85.8125; Chicago-based Northern Trust Corp. rose $9.9375, or 17.53%, to $66.625; and Birmingham, Ala.-based Compass Bancshares, which rose $3.75, or 22.39% to $20.50.
Helping the rally along were comments by Goldman Sachs strategist Abby Joseph Cohen, who told investors to overweight their portfolios with financial stocks by 17% while underweighting their position in technology stocks.
"The cracks that we were looking for in technology stocks appear to have begun," said Eric Rothmann, an analyst at First Security Van Kasper in San Francisco. "This rally was bound to happen. We were seeing bank stock prices below book value and in an extremely strong economic environment."
Among individual issues, FleetBoston Financial Corp. rallied after Keefe, Bruyette & Woods Inc. raised its recommendation and estimates because of its strong business operations. Analyst Thomas Theurkauf upgraded Fleet to "buy" from "attractive" and added the company to Keefe Bruyette's "action list."
Mr. Theurkauf said in a note to clients that though many banks have experienced margin compression, Fleet will probably experience "modest margin expansion" because of strong revenue momentum fueled by its investment banking, brokerage, and private equity businesses. Mr. Theurkauf said he also expects Fleet to announce a buyback in coming weeks. Fleet's shares rose $3.125, or 10.80%, to $32.0625.
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State Street Corp. performance (Source: Thomson Investors Network) Northern Trust Corp. performance (Source: Thomson Investors Network) Compass Bancshares Inc. performance (Source: Thomson Investors Network) FleetBoston Financial Corp. performance (Source: Thomson Investors Network)
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