The Market Booms, but Do You Own Any Duds?

July 17, 2007— -- The stock market is having an amazing run.

In just 57 days, the Dow Jones industrial average has shot from 13,000 to 14,000 -- an incredible jump in such a short period of time.

The Dow first crossed the 13,000 mark April 20. Since then it has climbed more than 7.6 percent, jumping over the record 14,000 mark early in the trading day on Tuesday.

In comparison, the climb from 12,000 to 13,000 took more than six months. The only period in which we've seen a faster jump was during the dot-com boom of the late 1990s, when the Dow went from 10,000 to 11,000 in only 24 days.

For the year, the Dow is up about 12 percent. The Nasdaq has still not topped its highs from before the dot-com bust but is still up 11.3 percent for the year. The Standard & Poor's 500, often considered a better indictor of the health of the economy, is up 9.4 percent for the year.

Why the run-up in stocks? The 30 U.S. companies that make up the Dow are not being held back by lackluster economic growth in the United States.

About 40 percent of their profits come from overseas, where economic growth has exceeded the performance of the U.S. economy.

And while tourists hoping to travel abroad this summer are getting whacked by the weak dollar, corporate America loves it. A weak dollar makes U.S. goods less expensive to foreign buyers.

All this, and plenty of free cash from private equity and other sources, has been pouring money into the market.

Leading the charge on Wall Street is aluminum producer Alcoa, which has been the subject of takeover talks. Its shares have skyrocketed 36 percent in the last three months.

The Dow is being pushed up by several other large industrial companies, including construction equipment maker Caterpillar and industrial conglomerates Honeywell and 3M. Their shares are up 19.6 percent, 18 percent and 17 percent, respectively, since April 20.

Pat Dorsey, director of equity research for Morningstar Inc., said the common thread between these companies is cyclical stocks linked to global economic growth.

Honeywell, for instance, has a large aerospace division that benefits from growth in air travel, including new routes opening in places such as India and China.

Caterpillar, Dorsey said, benefits from new road and railroad construction, again in developing countries. Alcoa benefits as aircraft builders need aluminum and automakers replace steel with aluminum to improve fuel efficiency.

But not all companies and investors have profited from the Dow's rise to 14,000.

Banking and consumer finance companies have lagged behind, as have some pharmaceutical and retail companies.

JPMorgan Chase lags behind the rest of the Dow, losing about 5 percent of its value since the index first crossed 13,000. Fellow bank, Citigroup, is down 2.3 percent and consumer finance company American Express is up only 1.4 percent.

Pharmaceutical companies Pfizer, Johnson & Johnson and Merck are all down. The pain is also being felt in the retail world, with drops seen at household product maker Procter & Gamble and Wal-Mart, the world's largest retailer.

Walt Disney, parent company of ABC, has seen a 2.3 percent drop.

Dorsey said that a lot of these stocks were very hot a few years ago but have now cooled, as they "have had to bleed off the excesses of the late 90s."

The "old economy" stocks such as Caterpillar were once thought to be dead, and everybody jumped into pharmaceuticals, health care and banking. Now that trend is switching, even though Dorsey noted that Morningstar still has high ratings on these stocks. In particular, he said, there is enormous opportunity in a stock like Johnson & Johnson that for some reason investors have ignored.

But the recent run in stocks isn't without risks. Fuel prices continue to climb and problems persist in the U.S. housing market following the fallout of the subprime lending market. As the Dow crossed over 14,000, the price of a barrel of oil hovered between $74 and $75 and the dollar continues to fall compared with the euro and the British pound.

Just one week ago, the Dow fell nearly 150 in one day upon bad news from Home Depot, Sears and homebuilder D.R. Horton. Yet the index quickly shot back two days later, climbing 283 points in one day after a series of retail sales reports.