Dow Jumps Despite Telecom Weakness; New Records Ahead?

The stock market built on yesterday's big gains, with every sector of the Dow rising except telecom. Can the Dow hit new all-time highs without AT&T and Verizon helping?

Feb 28, 2014 at 11:00AM
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On Friday morning, the Dow Jones Industrials (DJINDICES:^DJI) overcame a substantial downward revision to fourth-quarter GDP figures and tepid consumer sentiment figures for early February to build on the average's gains yesterday, gaining as much as 100 points before settling back to an 77-point rise as of 11:07 a.m. EST. As investors observe the S&P 500's (SNPINDEX:^GSPC) record close yesterday, they wonder whether the Dow will follow suit soon, even with AT&T (NYSE:T) and Verizon (NYSE:VZ) having held back the average lately and being the only two stocks that were down this morning after the first hour of trading.

The strength in stocks that we've seen in February has had support from a wide range of industries, from biotech to utilities. Unexpectedly calm interest rates have largely kept rate-sensitive stocks from losing ground, defying expectations coming into the year that the Federal Reserve's tapering of quantitative easing would lead to big rate increases that would hurt utilities and other industries sensitive to rate levels. Even though the Dow hasn't benefited as much from the strength in utilities and biotech as the broader market, most of its stocks have benefited from the upbeat attitude.

Skeptics point to the headwinds challenging Verizon and AT&T as potentially holding back the Dow. With signs of an escalating price war in the industry, investors in both telecom giants worry that eroding profits could bring their long growth periods to an end, leaving the stocks appropriate only for conservative income-seeking investors and reining in their valuations.

Yet bullish investors should take heart that when the stock market starts to push higher more strongly, it often does so at the expense of more conservative, income-oriented stocks. With Verizon and AT&T better known for their top dividend yields in the Dow than for their potential for growth, it's natural for investors to gravitate to other stocks with better growth prospects. Given the number of beaten-down cyclical stocks in the Dow, expecting those stocks to outperform AT&T and Verizon is more a sign of strength in the market than weakness.

With only about 200 points to go, it's likely that investors will push the Dow to a new record high before too long. The more important question for long-term investors is what will happen next, but at least for now, all signs point to a healthy economy that is growing at a measured but sustainable pace. That's the sort of environment in which stock investors can thrive.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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