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Market not derailed by economy

Published Jul. 2, 1998|Updated Sep. 13, 2005

The economy is slowing down, but investors have barely noticed. Halfway into 1998, stocks are trading at or near all-time highs despite the signs of a slowdown.

The market's gains are no longer as big or as easy as they were in the first quarter. Yet the big blue-chip stocks that many people keep calling overpriced continue climbing higher:

+ The Standard & Poor's 500 Index gained another 2.9 percent in the quarter that ended Tuesday. It was up 16.8 percent for the first half. Wednesday it closed at a new all-time high of 1,148.56, up another 1.3 percent.

+ The Dow Jones Industrial Average rose 1.7 percent in the second quarter and 13.2 percent for the first half. Wednesday it closed at 9,048.67, up 96.65 points, a gain of 1.1 percent, and approaching its high of 9,211.84, recorded in May.

+ The Nasdaq Composite Index, which gained 3.2 percent last quarter, has surged nearly 12 percent just in the past two weeks. It closed Wednesday at 1,914.46, nearly at its all-time best finish of 1,917.61 set in April. It was up 20.7 percent for the first half.

"There are not a lot of attractive alternatives for investors," Tampa money manager Dee Howland said. "They're going from one (stock market) sector to another rather than straying out into bonds or something else."

At least for now, investors are choosing stock market risk over the safety of 5 percent to 6 percent yields on government bonds and bank CDs.

Stock market strategists polled by Reuters news service said they expect continued moderate gains for blue chips during the second half of the year _ enough to produce an unprecedented fourth straight year of 20 percent increases for stocks.

However, corporations are likely to find it very difficult to produce anything close to the robust profit growth that helped fuel that extended run-up in prices. Many companies already have issued warnings that second-quarter earnings will not be up to expectations.

"The economy is definitely going to slow down in the second half of this year," said Scott Brown, an economist at Raymond James & Associates Inc. in St. Petersburg. Economists are starting to see a lot of evidence that economic problems in Asia are having an impact in the United States, he said, particularly among manufacturers.

The Federal Reserve Board chose Wednesday to leave interest rates unchanged _ a sign that Fed officials think inflation will stay in check without higher rates and that they want to avoid doing anything that might make Asia's problems worse.

Economic reports released Wednesday bolstered the sense of a coming slowdown. The nation's manufacturing activity slowed in June for the first time in nearly two years, according to a report by the National Association of Purchasing Managers. The association said more manufacturers reported a deteriorating business outlook than reported improving conditions. The association's price index was the lowest since the end of the 1991 recession.

A large part of the slowdown is attributable to problems in Asia, where consumers and companies have cut back their purchases of U.S. goods. In addition, the strike at General Motors has prompted the company to shut down 26 of its 29 North American assembly plants, idling more than 162,000 workers.

Since GM accounts for more than 1 percent of all U.S. output, the strike will show up in slower second-quarter growth, declining industrial production and fewer factory work hours, analysts said.

"We already know there's a big bite taken from second-quarter growth in the form of trade, a smaller bite from inventories and now another nibble is taken out for the GM strike," said Ken Mayland, chief economist at KeyCorp in Cleveland.

Manufacturing is not the only sector in which activity is slowing. The Commerce Department reported that construction spending fell 1.5 percent in May, the first drop in six months and the largest in more than four years. Some economists blamed rainy weather in some parts of the country.

"Construction numbers are affected by the vagaries of the weather even more than most other data," said Ian Shepherdson, chief economist at HSBC Securities Inc. in New York. "I would be reluctant to argue that these numbers mark the start of a serious construction slowdown."

A third measurement released Wednesday, the Conference Board's Index of Leading Economic Indicators, was unchanged for May, a situation the board described as "a lull that suggests a slowdown later in 1998."

In the first quarter, the economy grew at a 5.4 percent annual rate, but economists say a 2 percent rate is more likely for the second half.

That's good news to some investors who prefer low interest rates to strong economic growth. As long as the economy shows signs of weakness, the Fed is less likely to raise interest rates.

In addition, some investors already are looking ahead to the day when Asia rebounds from its problems. Japan was expected to unveil a proposal today to clean up problem bank loans, and many investors are optimistic that will help the economy.

Although the Fed is not bumping up interest rates, last week it wrote banks under its jurisdiction encouraging them to pay close attention to their lending standards in making commercial loans.

"It's effectively a way for the Fed to tighten credit without raising rates," economist Brown said. He said the result could be fewer business expansions.

The tight labor market also restricts expansion as companies find it more and more difficult to hire the employees they need to grow. Demand for workers also is nudging up wages even though companies have found it very difficult to raise prices. That puts a crimp in corporate profits, but also keeps inflation in check.

"It's hard to look at the U.S. economy right now and worry about inflation," Fed vice chairman Alice Rivlin said in an interview last week.

Although the stock market keeps going up, the gains are not across the board.

"We still have an awful lot of stocks down even though the indexes are up," money manager Howland said. "We've got mutual fund cash flows and perhaps international investments coming from other markets into our market and they're looking for large-cap liquidity. They're going into the big names like General Electric, which rule the indexes. Underneath all that, we've got kind of a scary market."

Florida stocks, most of them smaller companies, have not enjoyed the same gains as the blue chips. Robert W. Baird & Co. said the stocks in its Florida data base fell 2.5 percent last quarter although they were still up 12.4 percent for the first half.

The biggest winner was a Tampa travel agency, 800 Travel Systems, which tripled in value. The biggest loser was Sunbeam Corp., which fired its chief executive and lost three-fourths of its value.

_ Information from Bloomberg News and Times wires was used in this report.

Florida's winners, losers

Here are the Florida stocks that showed the largest percentage gains and declines last quarter.

Biggest winners

June 30 Percent

Company Headquarters Symbol Description price change

800 Travel Tampa IFLY travel agency $6.50 +215%

Systems

Able Telcom W Palm Beach ABTE telecom $18.00 +129%

equipment

Chicos FAS Fort Myers CHCS women's $15.50 +77%

clothing chain

Tropical Tampa TSIC men's sportswear $21.25 +50%

Sportswear Intl. maker

Med/Waste Miami Lakes MWDS medical waste $7.00 +46%

Inc. disposal

Gencor Orlando GX building $20.12{ +39%

Industries Inc. materials

Windmere- Miami Lakes WND appliance $35.81\ +38%

Durable Holdings manufacturer

Nobility Ocala NOBH mobile home $19.75 +33%

Homes Inc. maker

Audio Orlando ANI Muzak franchisee $5.93} +32%

Communications Network

Summit Lakeland SHSE managed care $31.87{ +32%

Holding Southeast services

Biggest losers

June 30 Percent

Company Headquarters Symbol Description price change

Sunbeam Delray Beach SOC appliance $10.43} -76%

Corp. manufacturer

Outsource Deerfield Beach OSIX human resource $9.00 -63%

International service

NetSpeak Boca Raton NSPK telecommunica- $12.43} -60%

Corp. tions software

Columbia Miami COB pharmaceuticals $5.75 -58%

Laboratories

Coast Tampa CDEN dental services $14.12{ -50%

Dental Services

Golden North Palm Beach JACK golf-related $5.00 -46%

Bear Golf products

Vision Largo EYES eye-care services $6.37{ -46%

Twenty-One Inc.

Sawtek Inc. Apopka SAWS electronic $14.75 -42%

components

Equinox Sunrise EQNX computer $8.31\ -42%

Systems Inc. equipment

HEICO Corp. Hollywood HEI aircraft $27.50 -42%

engine parts