Old Economy Keeps Rolling

Industrials, transports, small-caps and other 'early cycle' stocks continue to lead the market.
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The services segment of the U.S. economy may be what's keeping the nation out of recession, but the manufacturing portion of the global economy is helping keep the U.S. stock market afloat.

Monday's announcement by Warren Buffett's

Berkshire Hathaway

(BRK.A) - Get Report

that it has acquired a 10.9% stake in railroad company

Burlington Northern Santa Fe

(BNI)

is a testament to the sustainability of the global economic recovery and a reminder that this theme still drives the leaders in the stock market.

"It is a voice of confidence that we're still early on into this cycle," says James Paulsen, chief investment strategist at Wells Capital Management. "The railroad companies are hauling the copper and the lumber and other basic materials across the continent."

Burlington Northern gained 6.5% Monday and dragged competitors uphill with it.

Norfolk Southern

(NSC) - Get Report

,

Union Pacific

(UNP) - Get Report

and

CSX

(CSX) - Get Report

gained 3.6%, 3.8% and 2.3% Monday. The Dow Jones Transportation Average added 1.9%. Buffett has bought shares in two other railroad companies, according to

CNBC

, but he declined to reveal which ones.

Tony Crescenzi, fixed-income strategist at Miller Tabak and a

RealMoney.com

contributor, noted last week that shipping and hauling activity is more than healthy. The Baltic Dry Index, which measures shipping rates, reached its highest level since December 2004, marking a 20% increase over the past six weeks.

Commodity prices themselves are soaring, and there is more talk about so-called emerging economies being less threatened by a U.S. slowdown, an idea

proffered here in July.

The Wall Street Journal

reports Monday that most economists expect China's economy to slow by only one or two percentage points from its breakneck 10% pace of late -- even with its reliance on U.S. consumption.

Other signposts of this globally driven cycle also have returned in full force as global stock proxies rebound from recent bouts of volatility. Risk appetite is back, as emerging-market stocks are rallying again and risk premiums on emerging-market debt are near record low levels. Corporate credit spreads also are tight, while defaults on corporate debt remain virtually nonexistent and access to capital is still easy.

China's Shanghai Index jumped 2.3% while Japan's Nikkei gained 1.5% Monday.

Back on the home front, small-cap growth stocks are still in the driver's seat despite constant calls for the end of that leadership, and basic materials and energy stocks continue to outperform. The Russell 2000 is up 3% year to date, compared with 0.8% for the

Dow Jones Industrial Average

, 1.8% for the

S&P 500

and 2.2% for the

Nasdaq Composite

.

On Monday, the major stock indices ended the day near the flat line despite a stronger-than-expected March payrolls report on Friday, a slew of merger and acquisition activity, falling oil prices and a strong overnight session in Asia. The Dow gained 0.07% on the day, to close at 12,569.14, while the S&P added a fraction to close at 1444.61. The Nasdaq slipped a fraction to close at 2469.18.

Among stocks in the news,

Mirant

(MIR)

is considering a sale of the company, while rumors swirled about a private equity buyout of

Dow Chemical

(DOW) - Get Report

. Mirant surged 8.5% while Dow added 4.7%.

While the U.S. stock market was closed Friday, the Bureau of Labor Statistics reported that the economy added 180,000 new jobs in March, compared with expectations for payroll growth of 133,000. Much to investors' surprise, unemployment also ticked lower to 4.4% -- matching its low for this economic cycle. The Labor Department also revised January and February's reports higher, adding another 32,000 jobs to the tally.

Stock investors generally respond positively to strong jobs numbers, as they underpin consumer spending and overall household financial health. But this time may have been bittersweet, because falling unemployment dashes investors' hopes for a

Federal Reserve

rate cut.

"Strong March job growth, along with the ongoing streak of upward revisions to previous months, and a robust rise in wages, demonstrates that the U.S. labor market remains tight and that Fed rate cuts are likely nowhere in sight," writes Michael Darda, chief economist at MKM Partners.

Rising Treasury bond yields may have countered falling oil prices to cap the enthusiasm in Monday's broad indices. Bond yields rose in response to the jobs report, as concerns about growth fade and inflation worries mount. The 10-year note yielded 4.75% Monday, up from 4.67% on Friday. The price of a barrel of crude oil fell 4.3% to close at $61.51 Monday.

As earnings season gets under way Tuesday, traders may become less focused on broad macroeconomic trends. But with M&A and the global economy showing its resilience, the stock market may well take any scares in stride.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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