For the past couple of months, the canary in the coal mine has been singing away.
Despite concerns about the stagnant job market, high personal debt levels, a weakening dollar and huge current-account and budget deficits,
The Street.com 21
index, designed to be a leading indicator of the economy's direction for the rest of the year and beyond, has been suggesting that a solid recovery is in the works.
Since its July 7 inception, the
is up almost 11%, or 109 points, to 1109. The
, meanwhile, has risen 3.8%, and the
is up almost 13%.
"At present, financial markets are voting decisively in favor of global growth," said Bruce Kasman, senior economist at J.P. Morgan. "That equity markets continue to rise and the spreads on corporate and sovereign debt have narrowed reinforces the notion that the global expansion is firming."
All but two of TSC's components have risen since the close of trading on July 3.
Level 3 Communications
has skidded 20%, and
is off by 7%.
In contrast, shares of
have jumped 19%, while
has surged 17% and
is up a whopping 67%.
Smurfit Stone Container
have also been big winners, rising more than 14% over the past two-and-a-half months.
composition is intended to make it hypersensitive to economic change. The component companies are bellwethers of industries that tend to feel economic trends early.
So the gains aren't too surprising, given the generally good economic news recently. Gross domestic product rose at a 3.1% pace in the second quarter, and the Institute for Supply Management said its factory index rose in August at its fastest pace in eight months.
Meanwhile, earnings are expected to be good in the third quarter. Caterpillar is forecast to earn 73 cents a share in the quarter, compared with 61 cents a year earlier. Ingersoll-Rand, Tiffany and Continental are also expected to post respectable profit growth for the third quarter.
Still, some analysts think these economically sensitive names are forecasting much stronger growth than is likely to materialize this year. "These stocks have well outrun their fundamentals," said Jeffrey Saut, chief investment officer at Raymond James.
Valuations certainly look stretched right now. The TSC index currently trades at 44.5 times trailing 12-month earnings and 37 times estimated full-year earnings. That's troubling, given that analysts are still questioning the sustainability of the economic rebound.
"These stocks have been bid up on the perception that we're going to have 5%, 6% or 7% GDP growth," Saut said. "I don't see any way that we're going to have that kind of growth. All we're seeing are the effects of the refinancing afterburn, heavy deficit spending by the government, mainly on defense and the rebate checks. Once that bleeds off, we will revert back to 2%, 3% GDP growth."
Other analysts are more optimistic, however. Richard Nash, chief market strategist at Victory Capital Management, notes that energy prices have fallen recently and that Treasury yields are down about 45 basis points from their highs. "Lean inventory levels, improving corporate cash flow, accommodative monetary policy and increased demand should result in an economy that exhibits sustainable improvement," he added.
Nash said that valuation is "not a good timing mechanism," because stocks tend to move to extreme levels instead of settling around fair value.
The 21 companies in the TSC index represent a diverse range of industries from retail to financial services to heavy machinery. On Monday the index fell 18 points, or 1.6%, to 1109.
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