Rust Belt Stocks Surge in Quarter
To make money on Wall Street these days, try getting your hands dirty.
That was the lesson of the third quarter that ended on Thursday. In a down market overall -- the Standard & Poor’s 500 index dipped 2.3% in the three months -- shares of companies in such heavy-industry sectors as steel, mining and energy exploration racked up big gains.
It was a continuation of a rally that had lifted those Rust Belt issues in 2003. But their performance stood out last quarter in part because so many “new economy” investor favorites fared so poorly.
Technology stocks such as Intel and Cisco Systems fell sharply in summer as investors fretted that supplies of tech components exceeded demand.
In the steel business, by contrast, the concern was that demand was far outstripping supply. Optimism about industry earnings drove shares of Steel Dynamics, an Indiana-based mill operator, up 35% in the quarter, to a record $38.62 on Thursday.
Beyond technology, some longtime Wall Street stars in other nonindustrial sectors also suffered drubbings in recent months. Coca-Cola and Colgate-Palmolive both warned in September that near-term earnings would be disappointing. Fannie Mae, the mortgage-finance giant, was slammed over accounting issues.
And on Thursday, shares of drug titan Merck plunged after the company said it would pull a key drug off the market because of health complications.
In the third quarter, Coke stock lost 21%, Colgate slid 23%, Fannie Mae dropped 11% and Merck tumbled nearly 31%.
Many industrial shares, by comparison, handily outperformed major market indexes -- even as the Federal Reserve began to tighten credit, raising its benchmark short-term interest rate three times. Copper miner Phelps Dodge rose 19% in the quarter. Chemical firm Georgia Gulf jumped 24%. Industrial components maker Rockwell Automation advanced 3%.
Earthmoving equipment giant Caterpillar sold off with the broader market in July, then surged this week after the company boosted its sales forecast for the year. Overall, the stock posted a gain of 1.3% for the quarter, while the Dow Jones industrial average gave up 3.4%. The Dow closed Thursday at 10,080.27, down 55.97 points for the day.
The tech-dominated Nasdaq composite lost 7.4% in the quarter, although it finished Thursday with a gain of 2.9 points to 1,896.84. The S&P; 500 edged down a fraction of a point Thursday, to 1,114.58. Trading volume was swelled by Merck’s sell-off.
Despite their generally strong performances in the third quarter and for the year to date, heavy-industry stocks are a tough sell with many investors, analysts say.
“People say, ‘They’re cyclical and they’re not sexy,’ ” said Sam Stovall, chief investment strategist at Standard & Poor’s in New York.
But he believes that many of the companies have healthy prospects. The key is the outlook for business capital spending in 2005 relative to consumer spending, Stovall said.
“We see capital spending as being the real driver of the economy” next year, he said.
The idea is that many companies may have just begun to loosen their purse strings, and should be poised to use more of the record earnings they’ve accumulated since 2002 to upgrade equipment.
“The business side of the economy still has some pent-up demand,” said Ethan Harris, economist at brokerage Lehman Bros. The same can’t be said of consumers, he added.
Another plus for the sector: continuing strong demand for industrial equipment and basic materials such as steel and copper from China, India and other fast-growing economies.
Further weakness in the dollar’s value against other currencies also could help U.S. industrial companies drum up more business overseas. A weaker dollar lowers the price of U.S. goods for foreign buyers.
The euro ended at $1.243 on Thursday, its highest level since mid-July.
But the major wild card for financial markets is oil, many experts say. Crude oil futures in New York inched closer to the $50-a-barrel mark on Thursday, adding 13 cents to $49.64. The price rocketed $12.59 a barrel, or 34%, in the third quarter.
If oil goes higher, many industrial companies could find demand for their products waning as energy costs drain the pockets of potential customers.
Rising oil prices “are basically a tax increase,” said Peter Kretzmer, economist at Banc of America Securities in New York.
Indeed, some bulls say it’s surprising the stock market hasn’t fared worse this year, given the jump in energy prices.
Most market indexes still are in the black year to date; the S&P; 500 is up 0.2%; the Russell 2,000 small-stock index, which fell 3.1% in the third quarter, is up 2.9% since Jan. 1.
In part, stocks have been bolstered by falling long-term interest rates. The 10-year Treasury note yield ended Thursday at 4.12%, up from 4.09% on Thursday but down from 4.58% on June 30.
Most market pros didn’t expect long-term rates to fall while the Fed was in the early stages of raising short-term rates. Some analysts say bond investors are locking in yields because they expect an economic slowdown.
That could be avoided if oil prices were to pull back soon. A drop in energy prices also could quickly revive demand for some of the beaten-down consumer growth stocks, analysts say.
But the next big test for the stock market will be third-quarter earnings reports, which will begin to flood Wall Street by the middle of this month.
Corporate warnings of near-term profit shortfalls have accelerated in recent weeks. Still, in all, operating profits for the S&P; 500 companies are expected to be up 14.2% in the quarter from a year earlier, according to earnings tracker Thomson First Call.
The question is whether that would be enough to keep investors interested in the market -- and whether profit growth in the Rust Belt names can justify the stellar quarter many of the stocks just enjoyed.
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Key stock indexes in 2004
Despite losses in numerous stock sectors in the third quarter, the market is a mixed bag year to date: Many key indexes still are in the black.
Year-to-date changes in major indexes, through Thursday
NYSE energy: +18.4% Dow utilities: +10.7% Bloomberg REITs: +10.1% Dow transports: +7.9% S&P; small-cap: +7.8% S&P; mid-cap: +3.0% Russell 2,000: +2.9% NYSE composite: +2.0% S&P; 500: +0.2% NYSE healthcare: -2.1% Dow industrials: -3.6% Nasdaq composite: -5.3%
Source: Bloomberg News ** Changing of the guard
Shares of Intel and many other tech giants have resumed their downtrend this year, while heavy-industry names such as Steel Dynamics have rallied sharply.
Weekly closes and latest Intel Jan. 2004: $32.16 Sept. 2004: $20.06 (down 1 cent) Steel Dynamics Jan. 2004: $23.70 Sept. 2004: $38.62 (up 98 cents)
Source: Bloomberg News
