The words "high-priced" and "
don't often go together.
They might be a fine pair now, however, because the discount retailer's stock hit a new 52-week high Tuesday. Kmart is not alone. During the past few weeks, a number of other retailers, along with cyclical stocks like
, have made their way to the new-high list on the
New York Stock Exchange.
That cyclical stocks are hitting new highs is further proof of a marked turn in market sentiment. As recently as three weeks ago, insurance companies and defensives like tobacco giant
hit new highs as investors maintained interest in companies more likely to be buffered from the economy's woes.
But the worm has turned and those names have been eclipsed by stocks like
, home improvement retailer
, and aluminum giant
, all of which hit new highs in the past several trading sessions. Companies that rely on corporate America to fuel their growth do better when business investment and the economy improve. Retailers gain as interest rates come down and consumers feel confident they will be able to hold on to their jobs.
In January, investors were hoping the
Federal Reserve's rate-cutting efforts would help the economy. But they weren't yet voting with their pocketbooks. The chief sector showing any kind of consistent strength at the beginning of the year was
energy, based on the assumption rising prices would fuel profit growth and business investment.
The broader market didn't really gain confidence in an economic improvement until the Fed had done a lot of work. In early April, the market again started to fly and wide swaths improved mightily. Cyclical stocks, which perform well in anticipation of an economic recovery (and fall when economic growth sags), led the way.
Take Caterpillar. The
Dow component and maker of user-friendly stuff like backhoes peaked in mid-1999, well ahead of the
S&P 500. The stock hit a 52-week low in October 2000, preceding a valley in the S&P 500 by about five months. On May 16, it hit a new 52-week high. Buying stocks like Caterpillar represented "classic buying at the bottom of the economic downturn," says Barry Hyman, chief investment strategist at
Ehrenkrantz King Nussbaum
The rise of cyclical stocks isn't the only evidence of improvement in the market. The Dow Jones Industrial Average burst through the
11,000 mark last week, closing within 4% of its all-time high. Even the
Nasdaq Composite Index, which shed more than 60% of its value from its March 2000 high, has been gaining steadily since the beginning of April.
As the major market averages have gained, a greater number of stocks have been hitting new highs on the NYSE. On average, more than 200 stocks reached 52-week highs on the Big Board in the past four sessions, which hasn't happened since December. During the first four months of 2001, there was an average of 113 new highs and an average of 32 new lows each day.
Thanks, Now Goodbye
Hyman recently removed Caterpillar from his list of recommended stocks. Other investors have apparently started to feel the same way. Caterpillar, Dow Chemical and
have dipped from their highs in the past few days. There's double reasoning to this. Investors are beginning to look to other growth and cyclical names that can do better than the likes of Cat, and they're guarding against holding these stocks at expensive prices. They're also displaying a bit of wariness about the pace of this rally.
As the economy continues to improve, investors typically increase their attention to sectors that post stronger earnings growth than heavily cyclical stocks. This includes financials, which typically benefit from lower interest rates, other retailers and semiconductor makers, which grow at faster rates than other cyclical names as the economy improves.
Yet these stocks have already been performing well. So it's hard to see where the next leadership -- and the next new highs -- will come from. While investors were happy to jump into high-tech shares a month and a half ago when they were 30% lower than today, the desire to buy with abandon is a bit diminished: It's still not clear when business spending will improve and drive corporate profits higher. As a result, different stocks and sectors are rallying at once as the market shows broad-based improvement.
Jim Russell, head of equity research at
Fifth Third Bank
in Cincinnati, bought retailers like
earlier in the year, but he isn't anxious to add to existing positions.
His more recent activity has led him to a kind of two-pronged approach of buying some technology shares like
, but also putting money into names like insurer
. He and several others interviewed suggested that while it's a good bet the economy will improve, the recovery may not be as strong as the
recent rally has suggested. So he's attempting to balance risks.
If other investors are like Russell, they might begin to see a hodgepodge of companies -- instead of names concentrated in just a few sectors -- hitting new peaks.