Utility Index’s Strength Could Signal a Bottom
Is the stock market trying to make a stand here?
It may not have looked like it on Monday, when the Federal Reserve Board tightened credit again and the Dow industrials dove 41 points. Yet some Wall Streeters saw indications of a bottom--at least a near-term bottom--that day, and more such signs on Tuesday.
The Dow rebounded from a loss of more than 30 points at midday Tuesday to close down only 0.60 point at 3,619.82. As during the April 4 selling frenzy (that memorable Monday after Easter), buyers appeared to swarm as soon as the Dow dipped below 3,600.
More important, there has been surprising strength lately in electric utility and financial stocks, whose declines last fall were a foreshock to this year’s broad market slide.
The Dow utility index fell only marginally Monday, despite the industrials’ plunge. And on Tuesday, the utility index rose 1.45 points, or 0.8%, to 195.56, making it the only major stock index to post a meaningful gain.
The bulls believe there’s a powerful message here if the rebound in the beaten-down utilities, banks, brokerages and other interest-rate- sensitive stocks can be sustained: Because those groups’ collective plunge had so accurately predicted the recent rise in rates, a turnaround in the stocks could mean the market believes rates are ready to plateau, if not decline.
“The financial stocks are acting as if the worst is over for interest rates,” says Andrew Addison, publisher of the Addison Report investment newsletter and a veteran technical market analyst.
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Richard Eakle, head of money manager Eakle Associates in Fair Haven, N.J., agrees. Anyone smart enough to recognize the implications of the Dow utilities’ peak last Aug. 31--five months before the Dow industrials peaked--should also realize that the utilities’ early-warning system often works in both directions.
“The utilities tend to bottom before the rest of the market and signal a change in direction” of stock prices in general, Eakle says.
Of course, it may be early to be calling a bottom in financial stocks. The Fed is expected to raise short-term money market rates, now at 3.75%, to at least 4% before summer in an effort to keep the economy from overheating. And if the expansion keeps rolling along, Wall Street may conclude that 5% short-term rates are likely by year’s end.
Whether that level of rates is priced into financial stocks is far from certain. If not, the utilities and banks could take another bad spill this summer or fall, even though they have already plunged 20% or more from their ’93 peaks.
Still, it’s worth noting that many bank stocks have responded positively this week to their quarterly earnings reports, while technology and auto stocks--the market’s leaders until recently--have mostly been bludgeoned by profit takers despite strong earnings.
On Tuesday, First Interstate Bancorp shares rose 37.5 cents to $77.375 after reporting first-quarter earnings. Bankers Trust added 50 cents to $70 on its profit report, and NationsBank leaped $1.125 to $53.375, a 1994 high.
In contrast, Chrysler plunged $2.375 to $48.50 on Tuesday even though it reported a record quarter. And computer chip giant Intel fell $1 to $57.50, a 1994 low, after its earnings failed to impress.
What the nibbling at bank, utility and other such stocks could indicate is that investors are turning sharply “defensive”--meaning they’re factoring in the chance of a significant slowdown in the economy this summer and fall because of the surge in interest rates. A weaker economy would be a negative for industrial and technology companies, but it would help financial and utility stocks if the end result is another decline in interest rates.
Investors’ defensive mind-set has been evident throughout the market’s recent slide. Most of the stock groups that have held up best have been classic defensive plays such as grocery and drugstore chains--businesses that tend to enjoy stable demand rather than boom-and-bust cycles.
If more investors shift to a “hunker-down” mentality, selling of industrial and tech issues could accelerate, while groups such as drug companies, food makers and energy firms could revive along with financial and utility issues.
But many Wall Streeters still believe that defensive stocks are at best a short-term play and that the real market leadership over the next two years will remain the industrial and tech issues--assuming global growth isn’t completely derailed. You can sell those stocks now, some pros say, but only if you think you’ll be quick enough to buy them back before they blast off again.
The Best Defense?
The strongest stock groups since the Fed’s initial credit-tightening move Feb. 4 have mostly been classic “defensive” consumer products industries, while the housing sector has taken the biggest hits.
WINNERS
Avg. chng. Group since Feb. 2 Engineering +10.1% Clothing makers +6.4 Grocery chains +5.6 Drugstores +4.1 Toy makers +3.4 Hospital cos. +3.4 Clothing-retail +3.2 Cosmetics +2.8 Regional banks +2.2 Alcoholic bevs. +2.0
LOSERS
Avg. chng. Group since Feb. 2 Home builders -34.2% Airlines -25.2 Hotels-motels -23.3 Building mat. -22.4 Mfg. housing -21.9 Gold -19.7 Drugs -18.1 Aluminum -17.1 Housewares -16.7 Pollution control -16.0
Data through Monday.
Source: Smith Barney Shearson, using Standard & Poor’s indexes
