Blue-Chip Stocks Gain From Rate Cut

INTEREST-RATE sensitive stocks - many of them major blue-chip companies listed on the New York Stock Exchange - are suddenly showing exceptional year-end muscle, thanks to recent rate reductions undertaken by the Federal Reserve Board.Throw darts at a board listing most blue-chip stocks and "you'll probably hit 15 or more sectors that now look very promising," says Dennis Jarrett, a market analyst with Kidder, Peabody & Co. "Today's stock market environment is tough to discern," because of the many weaknesses in the underlying economy, Mr. Jarrett says. Yet it is clear that stocks related to interest rates, such as banking and some manufacturing firms, are being acquired by both institutional investors and individuals. Smaller-capitalization companies - so-called "secondary stocks have not been showing growth commensurate with the larger blue-chip companies in recent trading sessions. Market gains now primarily involve the bigger "large-capitalization stocks," Jarrett says. "The stock market has been looking pretty good in recent trading days," says Hildegard Zagorsky, an analyst with Prudential Securities Inc. "There's room for additional growth, although we've gone a long way in a very short space of time." That means a market correction is possible, Ms. Zagorski says. On Dec. 24, for example, the market shot up to 3,050.98 on the Dow Jones industrial average - close to the market's previous high of 3,077.15 points on Oct. 18, 1991. One possible boost in the days ahead: Smaller-cap stocks usually show strength in January, following tax-related selling in December. Still, for now, the larger blue-chip firms remain dominant within the market. What's driving the market, say analysts here, are improvements in a number of key sectors throughout the United States economy. Among companies showing recent market strength are Alcoa, Illinois Tool Works, General Electric, International Paper, and UAL Corporation, the parent company of United Airlines. The sectors showing potential gains are themselves interest-rate linked, notes David Wyss, an economist with DRI/McGraw-Hill, an economic consulting firm in Lexington, Mass. And the key component may well be housing, which traditionally shows improvements following rate cuts. Mr. Wyss predicts the housing market will start to show gains in the second quarter of 1992, since there is always somewhat of a lag between actual rate reductions and new sales or housing construction. Moreover, industries related to housing and home construction, such as air conditioning and heating, will start to post gains toward the end of the summer. Construction-related industries tend to perk up first, ahead of new sales of appliances, furniture, and other home-related consumer products. The hous ing-related consumer industries should show some gains later in the year, reckons Wyss. Other sectors that could show strength in the months ahead, Wyss says, are banking, manufacturing, and exports. Lower interest rates tend to hold down the value of the dollar, which shores up the competitive position of US goods abroad. Unfortunately, notes Wyss, many overseas economies are starting to slow, which means that gains for US exports will be modest. Regions of the US showing possibility for improvement include the upper Midwest, where much of the US manufacturing sector is located, and the Pacific Northwest. Other pockets of growth may include North Carolina, which is now a major manufacturing state, Wyss notes. The main weakness in manufacturing, says Wyss, is the auto industry, where sales remain at depressed levels. Wyss does not see any significant rebound for autos until the 1993 model year, which would start in October of 1992. While the current market is focused largely on blue-chip stocks, it is also a very selective environment. Jarrett says investors should judge companies on their unique strengths, not on whether the companies belong to a certain sector.

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