Utility stocks have been steadily declining, casting fear into the hearts of stock market analysts who believe these issues are a harbinger of higher interest rates and further weakness on Wall Street.
"They're crushing these things," Dudley Eppel, senior stock trader at Donaldson, Lufkin & Jenrette Securities, said of utility stocks Friday.The decline is one of many indications that "interest rates are going up, whether we like it or not," he said.
Utility stocks have fallen about 16 percent since last September, a bigger drop than their 13 percent decline before the big market crash in 1987, notes Hugh Johnson, First Albany Corp.'s market strategist.
The Dow Jones average of 15 utility companies closed Friday at 188.83, down 3.96, or 2.05 percent. The average has fallen about 19 percent from its peak of about 233 near the end of last year. That compares with a drop of about 8 percent in the Dow Jones industrials and 14 percent in the Dow Jones transportation average from their peaks earlier this year.
The Dow utility average fell to the low 190s in early April, then attempted a recovery, rising to about 203 in mid-April. That prompted a little optimism, mostly in the bond market, that the current stock market correction might be over.
But the April rally was short-lived, and utility issues quickly began sinking again.
"I saw nothing that suggested overall that the bottom was in place," said James Schroeder, market analyst at MMS International in Chicago. "I found it a bit amusing that bond people were pointing to utilities and saying, `Here we go, this is it.' That's ludicrous, considering how far it's fallen. Since the April low, it has done nothing."
Schroeder is among those who believe utility stocks are pointing the way to a lower overall stock market.
"They're very successful; they never miss" as a market indicator, said Thom Brown, market strategist at Rutherford, Brown & Catherwood in Philadelphia. "When you get a big selloff in utilities, the stock market is bound to follow in its entirety at some point. It can take as much as six months, sometimes sooner."
Johnson said movements in utility stocks do not necessarily anticipate interest rate moves, but rather coincide with them.
But as a leading indicator for stock market directions, utility stocks are very much on target, Johnson agreed. Utilities began declining well before major market downturns in 1990, 1987, 1984 and 1982, he said.
Utility issues are leading indicators for one main reason: Utility companies have high construction costs that require them to borrow heavily in the capital markets. That means they are very sensitive to interest rate increases.
Ultimately, higher interest rates usually cut into the profits of most corporations, sending the entire market lower.
On Friday, the Dow Jones industrial average fell 26.47 to 3,669.50, bringing its loss for the week to 12.19.
Broad market indexes also fell. The NYSE's composite index declined 2.02 to 248.47, down 1.89 for the week. The Nasdaq index lost 7.69 to 732.86, losing 0.98 for the week. At the American Stock Exchange, the market value index retreated 1.97 to 439.73, off 0.18 for the week. The Standard & Poor's 500 index lost 3.56 to 447.82, down 3.09 for the week.
The Wilshire Associates Equity Index, which is the market value of NYSE, American, and OTC issues, ended the week at $4.47 trillion, off $24.27 billion from last week. A year ago the index was $4.36 trillion.