Investors content to be bystanders

Conflicting information keeps traders on the sidelines

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Traders

Traders work on the floor of the New York Stock Exchange May 23. (BRENDAN MCDERMID / REUTERS)

Love it or leave it ... or play the wallflower.

The wallflower role has been the preferred stance in the stock market this year. Investors have been willing to hang around after the thrill of 30 percent gains last year and modest growth in corporate profits during the first quarter. But with stocks pricey and signals that the economy isn't growing as much as expected, investors have been watching without much interest in buying stocks.

The Standard & Poor's 500 index hit a new high Tuesday, closing at 1,911.91. Yet, despite a gain of 3.4 percent for the year, stocks have meandered slowly up and down based on little volume. In other words, the market's been in what's called a trading range with few investors convinced they should either load up or lighten up on stocks.

The indecision comes partly from the bond market, which has been flashing warnings lately as yields on 10-year Treasurys have fallen sharply from last year's 3 percent to 2.53 percent. When yields dip, it suggests investors see a weak economy ahead and consequently are taking cover in bonds. But the economy isn't the only factor influencing bonds, so analysts aren't sure if they should interpret the bond yields as an overly worrisome sign. Geopolitical concerns, for example, could be one factor driving investors into bonds and causing yields to fall.

Meanwhile, transportation stocks are delivering the opposite message about the economy.

According to Dow theory, when transportation stocks — everything from railroads to trucking and airline companies — are rising sharply, investors are anticipating strong growth ahead. The stocks are considered a good indicator of the economy because the transports carry the products that move when the economy is robust.

This year the airline stocks of the S&P 1500 composite index have climbed 36 percent after soaring 67 percent last year. Trucking companies have climbed 10.7 percent after a 36.5 percent move last year, and railroads are up 9 percent after a 39.7 percent gain last year.

The transportation stocks as a group are among the strongest of stocks — suggesting a strengthening economy while companies dependent on consumer spending have been weak.

Retail companies recently reported disappointing earnings, and retail apparel stocks have declined about 7.5 percent for the year. Furniture stocks are down 12.2 percent, and computer and electronics companies have been hit hard, with a decline of 27.4 percent.

Ideally, in a robust economy, stocks that reflect consumer buying and business activity would be rising. But after a surge in consumer stocks last year, and with recent jobs and income data still showing pressure on consumers, analysts have focused more on rising business activity. Forecasts for strong growth in the economy this year depend on companies buying business equipment, plus adding and improving facilities that produce products.

The fact that transportation stocks are up so strongly suggests investors think trains and trucks will deliver healthy quantities of everything from coal and oil to building materials and computers. Some of the upturn in airline stocks, of course, is related to business models such as airlines figuring out how to run planes stuffed to capacity while dumping routes that don't cut it. And cheap natural gas, which is an outgrowth of the nation's shale energy boom, has allowed trucking firms to cut costs and enjoy greater profits.

The strength isn't universal, as investors showed with United Parcel Service's 2 percent decline this year. But William Lynch, director of investments at Hinsdale Associates, notes: "Right now the broad stock market seems to be marching to the tune of the transportation average and it likes what it hears."

On Tuesday, transportation was a sweet spot in the nation's data on April durable goods orders. Transportation orders rose 2.3 percent in April. Yet, while the overall durable goods orders were better than analysts were expecting and the data helped lift the market, analysts still don't see the widespread gains in demand for large equipment that they hoped businesses would buy and drive the economy.

Computer orders fell 1.1 percent in April and machinery orders dropped 2.9 percent.

"Despite expectations of a ramp-up in corporate investment, businesses still appear to be sidelined as we head further into the second quarter," said economist Lindsey Piegza of Sterne Agee. "The expectation of a rebound after significant weakness at the start of the year has failed to come to fruition in either retail spending or business investment — at least so far."

That doesn't mean the economy is going into a recession or that stocks are going into a bear market. But BMO strategist Brian Belski says he thinks investors are taking a "much needed breather" while stocks absorb the "expansive price moves in stocks" from the recent past and "ambiguous macro data."

He adds: "We do expect volatility to increase, which is likely to keep the market in a fairly wide trading range."

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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