Bonds Set Table for Value Stocks, but Growth Is Still Stunted
Let's review.
The theme of the stock market over the last few months has been one of a rebounding world economy. Asia on the mend, Latin America looking to follow, a central bank in Europe that isn't afraid to cut rates to get the Continental economy going, a U.S. economy that -- defying predictions -- refuses to come off a blistering pace.
And so ended a long period in which growth outperformed value and big outperformed small. Cyclicals -- companies whose fortunes rise and fall with the global economy -- started to do well, while growth stocks -- shares of companies that can generate earnings no matter the economic environment -- lagged behind. It had been five years since that happened, during which time growth stocks saw their valuations rocket to unprecedented levels.
The rebounding world economy and the white-hot American one didn't go unnoticed by the bond market. Yields began to creep up as investors worried that the Fed might have to tighten. And, in fact, the Fed was worried that it would have to raise rates, too, as we found out when the
Federal Open Market Committee
moved to a tightening bias on Tuesday. Rising rates are trouble for all stocks, but particularly the ones with rich valuations. Another strike against growth.
"The Fed has moved from being friend to foe here for the equity market," said Richard Cripps, chief market strategist at
Legg Mason
. "We're all impressed with the resiliency of the market after the what the Fed did, but you have real problems with the market going higher. My guess is we're in a period of waiting to see if the economy cools."
That said, Cripps is seeing good action in mid-caps and small-caps -- the areas he focuses on. "The interest level in this sector -- it's like somebody turned on a light," the strategist said. "If we have a period of moderate inflation, as opposed to deflation or disinflation, that would support a move into these mid- and small-caps."
The action in stocks today has been generally consistent with the reflation theme. Value's better than growth. Small's better than big. Etc. The
Dow Jones Industrial Average
, chock-full of cyclical and industrial companies, was lately up 22.12 to 10,909.51. The
S&P 500
was up 1.67 to 1345.90 and the tech-hurt
Nasdaq Composite
was off 2.42 to 2574.98. The small-cap
Russell 2000
was up 3.71 to 449.85.
TheStreet.com Internet Sector
index was down 5.76 to 641.74.
But over in the bond market, something's been happening that could suggest a return to growth. The yield curve -- the difference in yield between the benchmark 30-year Treasury bond and the two-year Treasury note -- has been getting flatter. If that trend continues, that would indicate expectations of a slowing economy. And if that happens, explained
Merrill Lynch
quantitative strategist Kari Bayer, it could mean growth will start getting better again.
"Typically, when the economy is slowing, you want to buy growth stocks -- companies that have demonstrated over the long term that they can grow their earnings in a slowing environment," Bayer explained.
But Bayer doubts that the yield curve will really stay flat until the Fed actually starts cutting rates rather than just talking about it.
The 30-year Treasury bond was up 1/32 to 92 5/32, putting the yield at 5.81%.
Advancers led decliners 1,741 to 1,053 on 402 million shares on the
New York Stock Exchange
. In
Nasdaq Stock Market
action, advancers led decliners 2,088 to 1,540 on 540 million shares.
Thursday's Midday Movers
By
Heather Moore
Staff Reporter
Healtheon
(HLTH)
was soaring 41 13/16, or 52.6%, to 121 3/8 after confirming yesterday's reports that it will merge with privately held
WebMD
. The stock swap is valued at about $5.5 billion and calls for Healtheon to issue 1.82 shares for each WebMD share. Each company will own half of the merged company.
CAIS Internet
(CAIS:Nasdaq) was rising 5 11/16, or 29.9%, to 24 13/16 after
Bear Stearns
priced the company's 6 million-share IPO above-range at 19. The company is an Internet service provider based in Washington.
eToys
(ETYS:Nasdaq) was zooming 60, or 300%, higher to 80 after its 8.3 million-share IPO was priced at the top of the range last evening by
Goldman Sachs
.
In other news:
Covad Communications
(COVD)
was down 4 3/8, or 7.1%, to 59 after last night filing with regulators to sell 7.5 million shares in a secondary offering.
Devon Energy
(DVN) - Get Report
was up 1 1/2, or 4.8%, to 33 after buying
PennzEnergy
(PZE)
. PennzEnergy shareholders will own about 31% of the combined company, which will have a market cap of about $2.6 billion. Devon shareholders will own about 69%. PennzEnergy was down 3/8 to 14 1/4.
Tech Data
(TECD) - Get Report
was up 4 7/16, or 12.9%, to 38 13/16 after agreeing to become the IT procurement, configuration and assembly, and logistics services provider for the
GE Capital IT Solutions
unit of
General Electric
(GE) - Get Report
. The three-year deal is expected to generate about $2 billion in annual incremental revenue for Tech Data, whose sales for the latest year were $11.5 billion. GE was flat at 108.
Vodafone
(VOD) - Get Report
was up 7 5/32, or 3.6%, to 205 3/4 after saying it will consider a stock split once it completes its merger with
AirTouch Communications
(ATI) - Get Report
this summer. Airtouch was up 3/4 to 65 7/16.
Earnings/revenue movers
American Eagle Outfitters
(AEOS)
was up 2 1/4, or 5.9%, to 40 9/32 after last night reporting first-quarter earnings of 25 cents a share, 4 cents above estimates.
Etec Systems
(ETEC)
was down 3 1/2, or 9.4%, to 32 15/16 after late yesterday reporting third-quarter earnings of 9 cents a share, 1 cent below the 12-analyst prediction and far off the year-ago 47 cents. The company also warned of losses in the fourth and first quarters. Today,
Credit Suisse First Boston
cut the stock to hold from buy.
Photronics
(PLAB) - Get Report
was down 1 3/8, or 5.4%, to 24 3/8 after last night posting second-quarter earnings of 9 cents a share, 2 cents below estimates.
Lawnmower juggernaut
Toro
(TTC) - Get Report
was up 3 1/4, or 9.9%, to 36 after saying it expects to report second-quarter earnings of $1.81 to $1.83 a share. The three-analyst consensus is calling for $1.73.
Wet Seal
(WTSLA)
was down 3 1/2, or 8.5%, to 38 even after last night beating by 3 cents first-quarter forecasts calling for earnings of 31 cents a share.
