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Economic doubts make for two-faced stock market

May 17, 2011 |  9:47 pm

Wall Street has been a tale of two stock markets for the last couple of months or so.

Amid rising concerns about the outlook for U.S. growth, shares of many companies whose fortunes are closely tied to the economy’s swings either have turned down or have treaded water.

Meanwhile, so-called defensive stocks -- those of companies whose sales and earnings tend to be more predictable and less vulnerable to the economy’s vagaries -- have been on fire.

Tuesday’s market action provided a good snapshot of these trends. Separate reports on housing starts and industrial production, both for April, pointed to a further loss of momentum in the economy.

Indu That triggered fresh selling in shares of many industrial, energy and financial companies that could have the most to lose if the recovery continues to flag. Case in point: A Standard & Poor’s index of 59 large industrial issues (charted at left) slid 1.3% Tuesday to a one-month low.

Machinery giant Caterpillar fell $4.01, or 3.8%, to $102.08. The stock now has lost 11.6% since hitting a record high of $115.41 on April 29. Parker Hannifin Corp., which makes numerous industrial products including aircraft components, dropped $2.45, or 2.8%, to $85.25 on Tuesday. The stock is down 13.4% from its all-time high on April 26.

But as money has exited those stocks some of it has been flowing into shares of companies considered to be classic defensive plays -- in particular, those in industries including drugs, packaged food and utilities.

Drug titan Pfizer rose 16 cents, or 0.8%, to $21.14 on Tuesday, a three-year high. General Mills rose 26 cents, or 0.7%, to a record high of $39.87. Southern Co., a major southern electric utility, also hit an all-time high, up 34 cents, or 0.8%, to $40.60.

Util The Dow utility-stock index (charted at right) gained 0.9% to a 52-week high, and now is up 8.8% year to date, compared with a 4.6% rise for the average New York Stock Exchange stock.

The disparate trends have nearly canceled each other out in terms of overall market performance. The S&P 500 index, which was off fractionally on Tuesday, is down just 2.5% from its 33-month high reached on April 29.

Some investors think this split market performance is likely to continue. . . .

"The climate for financial assets is getting more hostile,” said Michael Vogelzang, head of money manager Boston Advisors, which oversees about $1.8 billion.

He ticks off some of the reasons: The Federal Reserve will wind down its bond-buying economic stimulus program by June 30; many foreign central banks continue to tighten credit; high gas prices are biting consumers; and Japan’s post-earthquake economic troubles are rippling out (that was one factor in the downbeat U.S. industrial-production report).

Vogelzang thinks big investors will continue to lighten up on economy-sensitive stocks. He said he has been shifting from energy and industrial issues to health care, utilities and other defensive industries.

Although the last few weeks have been painful for owners of economy-sensitive stocks, the strength of defensive shares has been encouraging to some Wall Street bulls: It shows that many investors don’t want to be out of the market entirely, and it means that losses have been minimal for diversified portfolios.

By contrast, the sell-off in spring 2010 hammered stocks across the board, driving the S&P 500 down 16% before it was over. In that decline, unlike this one so far, there were few places to hide.

-- Tom Petruno