Bank stocks, the scourge of Wall Street of late, rallied on Friday, bolstered by a stronger dollar and lower long-term interest rates.
Large capitalization stocks did especially well.
The upswing was spurred in part by a rally of the dollar against the yen and a lower yield on 30-year U.S. Treasury bonds, which fell to 6.05%, from 6.08%.
That sent most money-center and brokerage stocks upward. Chase Manhattan Bank rose 43.75 cents, or 0.6%, to $77.5625; Bank of America Corp., rose 25 cents, or 0.5%, to $55.9375; and Citigroup Inc. rose 50 cents, or 1.2%, to $43.6875.
Among investment banks and brokerages, Merrill Lynch & Co. rose $1.375, or 2%, to $71.9375, and Morgan Stanley Dean Witter & Co. rose $4.3125, or 5%, to $91.4375.
The rally was "not as great as you'd like if you're looking for some good signs of hope," said David Stumpf, an analyst for A.G. Edwards in St. Louis.
Regionals did not fare as well. The decline in interest rates helped stocks with huge amounts of shares outstanding, making them more liquid.
"It's about time," said Michael Laliberte, co-portfolio manager of the Imperial Bank Fund in Providence, R.I. "Bank stocks have been priced as though a couple of more rate hikes" were on the way.
Friday's good feeling seemed to more than offset what might ordinarily be considered bad news on the interest rate front. The Commerce Department reported an unexpected increase in housing starts, which rose 0.4% in August, to 1.68 million units. Analysts had predicted a 2% drop. The market seemed to thirst for good news, and it grabbed at a stronger dollar instead of the housing number. Strong housing starts indicate a buoyant economy, which could prompt the Federal Reserve to raise rates, while a stronger dollar means cheaper imports, which could reduce U.S. prices and give the Fed reason to be less concerned about inflation.
The rise in the dollar sent the long bond up in price, with bank stocks riding its coattails.
"The rally in the fixed income market is carrying over to banks and financial companies," said Stuart Hoffman, chief economist at Pittsburgh-based PNC Bank Corp.
But observers question whether bank stocks will regain much ground in the near term, saying the jury is still out on whether the Federal Reserve Open Market Committee will raise interest rates at its next meeting on Oct. 5.
With most of August's major economic reports already released -- such as the consumer price index, the producer price index, and employment figures -- some say the Fed has all the information it needs to make its decision.
Reports to come, such as sales of durable goods, "tend to be the supporting actors on the economic stage," Mr. Hoffman said.
"There is room for a rally if the financial markets come to firmly believe there would be no additional rate hike before yearend," Mr. Hoffman said. "The sentiment could swing either way. There are some partial rate fears are already priced in the market."
Many observers say that with the year-2000 date change looming, the Fed will be hard-pressed to turn the screw one more time before yearend. That should help bank stocks in the short-term, said Mr. Stumpf of A.G. Edwards.