Friday, June 11, 2004

Stocks face rising-interest future

By Meg Richards
The Associated Press

NEW YORK - Interest rates are definitely on the way up, and hawkish remarks from Federal Reserve Chairman Alan Greenspan have some on Wall Street thinking they might keep climbing for some time.

If you're wondering how to protect your portfolio from the declines usually associated with rising rates, you could take a hint from the past: Large and mid-cap companies have fared better than small caps, and growth seems to have an edge over value. Information technology and health care have been top performers, while telecom and utilities have fallen out of favor.

"It's logical that the sectors and companies that are heavily indebted would be hurt by rising rates, because the cost of their capital will go up," said Sandy Lincoln, chief executive of Wayne Hummer Asset Management.

Utilities, telecommunication business and some large-cap value stocks, such as automotive companies, tend to make heavy use of the debt markets, Lincoln said. Rising borrowing costs combined with slower growth can seriously dent earnings. Smaller companies are also vulnerable, as they often rely on debt to push their businesses forward.

While it's not gospel, "history is a good guide," said Sam Stovall, chief investment strategist for U.S. equity research with Standard & Poor's.

There have been six periods since 1970 when the central bank tightened rates multiple times over a period of many months. On average, in the six months following the first rate increase, the Standard & Poor's 500 fell 5 percent, nine of the 10 sectors in the index posted declines and all but one of 56 industries fell.

The hardest-hit sectors were interest-rate-sensitive financials, which tumbled an average 13 percent; industrials sank 12 percent; consumer discretionary stocks fell 11 percent; and utilities lost 10 percent.

The Dow Jones industrials ended the week up 167.28, or 1.6 percent, finishing at 10,410.10. The S&P 500 index added 13.97, or 1.2 percent, to close at 1,136.47.

The Nasdaq gained 21.25, or 1.1 percent, during the week, closing Thursday at 1,999.87. The Russell 2000 index, which tracks smaller company stocks, closed the week 1.37, or 0.2 percent, higher, at 569.12.

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