Stocks take a turn for better

`Old economy' shares get boost, belie idea of tech sector shift

Dow rises 202 points

March 04, 2000|By William Patalon III | William Patalon III,SUN STAFF

In just one week, the outlook for U.S. stocks has gone from funeral dirge to projected surge.

Two Fridays ago, the blue chip stocks of the Dow Jones industrial average were in a tailspin, having fallen 16 percent from their Jan. 14 record high -- just short of the 20-percent decline that typically has investors screaming "bear market."

And yet, that same day, the high-technology shares that call the Nasdaq composite index their home found themselves higher by 13 percent for the year, and less than 40 points from their all-time high set the day before.

The diverging fortunes of the "Old Economy" and "New Economy" stocks had some traders fearing that any kind of unforeseen bad news would be enough to break the market wide open.

By yesterday, the picture had changed completely.

A benign employment report sent the Dow up more than 202 points, to close at 10,367.20. That capped off a week in which the 30-stock index had gained 505 points and -- at least for now -- put talk of a bear market to rest. The Nasdaq continued to slip the surly bonds of earth, soaring 159.81 points, or 3.4 percent, to end the day and the week at 4914.32 points -- its 14th record high this year.

The Standard & Poor's 500 advanced 27.41 points, or 2 percent, yesterday to finish at 1409.14.

For the week, the Nasdaq jumped 7.1 percent, the S&P 500 5.7 percent and the Dow 5.2 percent. Last week marked the Dow's first five-day winning streak since August and pared the year-to-date loss of the blue-chip index from 16 percent to 9.8 percent.

Now stock traders speak of a reinvigorated bull market, since the upward trajectory of both indexes would seem to show that investors aren't swapping one group of stocks for another, and instead are bringing new money to the table.

In fact, market-watchers believe investors will keep sampling stocks from nearly all the sectors, instead of playing the risky game of funneling all their funds into one group of stocks.

"There should be follow-through next week and for the next couple of weeks," said Angel Matta, a senior vice president of listed trading at Baltimore's Legg Mason Inc.

The Dow's reversal of fortune comes at a juncture when there has been more uncertainty in the market than at any time since the rippling effects of foreign market woes, the so-called "Asian contagion," were felt during the summer of 1998.

Government reports have shown that the already sizzling U.S. economy actually shifted into hyperdrive as it approached the end of 1999 (in February, the economy set a record for the longest uninterrupted expansion in U.S. history -- a record that grows monthly).

Consumer confidence was in record territory, and the Federal Reserve -- which had already raised interest rates three times since June -- was becoming increasingly concerned that the economy was close to overheating, which might be enough to trigger inflation.

Cooling off the market

Fed Chairman Alan Greenspan was repeatedly voicing his concerns about the so-called "wealth effect" -- in which consumer spending escalates as the prices of such assets as homes and stocks go higher. In fact, he has been using every available opportunity to repeat his belief that stock prices were too high: Allowing consumer spending to continue unabated would ultimately cause demand for products and services to outstrip supply -- sparking the kind of inflation he has spent his entire tenure as Fed chief fighting. His solution: Keep raising interest rates until stocks stop rising and spending slows.

Greenspan has kept his word: Even after the three rate increases in the last half of 1999, the central bank in February stepped in to boost short-term interest rates a quarter-point again. It's widely expected to do so again at its meeting later in March, and market- watchers predict that rates could be increased several more times before the end of this year.

Interest-rate fears were a big reason for the divergence between the two indexes, experts say. "Old economy" companies -- like those that make up some of the Dow -- are viewed as more interest-rate sensitive than the high-technology firms that are counted as members of the "new economy," which make up the Nasdaq, said Hugh Johnson, chief investment officer for First Albany Corp.

Old vs. new

Among the old economy firms are old-line industrial companies whose fortunes ebb and flow with the economy, and also with interest rates. The reason: They're more likely to carry a hefty load of debt; when interest rates rise, so do their interest payments.

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