Investors Seeking Shelter Drive Dow Higher
What’s old on Wall Street is new again, as some investors turn back to “old-economy” industrial stocks.
Gains in those stocks have helped lift the Dow Jones industrial average to its highest level since late April.
Among the winners on Tuesday:
* Aluminum giant Alcoa (ticker symbol: AA) surged $2.25 to $34.63 on Tuesday, its highest close since April 13. The stock has jumped 25% since hitting a 52-week low of $27.63 on July 7.
* Chemical leader DuPont (DD) rose $1.94 to $48.56, its highest since mid-June, and a 13% gain from its 52-week low closing price of $43 on July 24.
* Emerson Electric (EMR), the largest maker of electric motors, rose $2.31 to a 52-week high of $67.38 on Tuesday.
* Heavy-machinery giant Caterpillar (CAT) gained $1.69 to $38.38 on Tuesday. Its two-day advance: 10.1%. “We haven’t seen a move like that in a while,” said Michael Driscoll, a trader at Donaldson, Lufkin & Jenrette Inc.
What’s driving these stocks, analysts say, is the growing belief that the Federal Reserve is finished raising interest rates to slow the economy.
More evidence to that effect arrived on Tuesday with news that second-quarter productivity gains in the economy were far larger than expected.
If business activity has indeed slowed, and productivity is keeping a lid on inflation, the Fed may be able to rest, economists say.
That, in turn, could mean that the economy is headed for a “soft landing” from which growth can accelerate again--good news for heavy-industry companies whose sales and earnings depend on a growing economy.
Fed policymakers meet Aug. 22 to consider their next move on interest rates.
But some analysts note that such “cyclical” stocks rallied in spring, only to fade again. On July 7, the Merrill Lynch index of 32 such stocks hit its lowest level since 1996. It has risen 7.7% since.
A big risk is that this rally, like the spring rally, is merely a reaction to the latest turmoil in technology stocks--which has sent some tech investors hunting for less-risky stocks.
In other words, buyers of industrial issues may simply be trying to play a short-term rally, rather than stay committed to the stocks.
But some technical analysts who watch stocks’ charts say some old-economy names appear more likely to sustain this latest move.
“The Dow has more stocks with upside potential” now, argues Arthur Hogan, chief market analyst at Jefferies & Co.
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New Life for Old ‘Cyclicals’
Some investors are snapping up “old economy” stocks again, as reflected in Merrill Lynch’s index of 32 such stocks, including Alcoa, DuPont and USX-U.S. Steel. But many analysts wonder if it’s another false start for the sector, whose fate is tied to the economy’s cycles.
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Weekly closes and latest for Merrill Lynch’s index of 32 “late cycle” stocks
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Tuesday: 107.80
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Source: Bloomberg News
