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Market Update

The Week in Stocks and Funds

A falling Consumer Price Index tugs the markets down.

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For the average consumer, the announcement this week that the Consumer Price Index (CPI) had fallen 0.3% in July was reason to cheer. It wasn't great news, however, for the stock market, since a falling CPI indicates companies haven't been able to raise prices for their products, which eventually could crimp their profit margins. For the week, the Dow Jones Industrials Average fell 175 points to 10,240, the S&P 500 dropped 29 points to 1,161, and the Nasdaq Composite lost 89 points, or 4.5%, to finish at 1,867. 

Fund Category Returns
The American Gas Association reported Wednesday that natural gas storage levels are much lower than expected. Since low supply usually leads to higher prices, energy stocks rallied. That, in turn, boosted natural resources sector funds up 3.45% on average for the week through Thursday. Some of the best-performing funds in that group included Fidelity Select Energy Service [ticker FSESX ], up 6.07%, and State Street Research Global  (SSGRX), up 4.93% for the week through Thursday. 

Although natural resources funds certainly looked appealing this week, they seem to have run out of fuel this year, losing 8% on average thus far in 2001. The problem has a lot to do with last year's tremendous rally: Natural resources funds gained 31.07% on average in 2000. Morningstar stock analyst Corey McElveen says most of the stocks in the energy sector are now either fairly valued or overpriced. Take Baker Hughs (BHI), which jumped 100% last year, but is down 14% in 2001. McElveen admires the company's focus on boosting profit margins, but he thinks the stock is far too expensive, which is why it sports a one-star rating

Sector and Industry Returns
While the energy sector rallied this week, rising 4.65% on average through Thursday, the tech sector fizzled, dropping 1.15%. In particular, makers of circuit boards and other electronic equipment used in high-tech gizmos got hit the hardest, with contract manufacturers like Celestica  (CLS) dropping 10.94% this week through Thursday. Although there isn't much hope for a near-term turnaround in tech, for long-term investors with enough nerve to endure continued volatility, a five-star company like Flextronics International (FLEX), which lost 7.9% this week, looks like a good investment, said Morningstar stock analyst Jay Ritter. 

The retail sector looked a little worse for wear this week, with one of the worst performers in the group, Gap (GPS), dropping 8.79% for the week through Thursday after it reported second-quarter earnings dropped 52% from the year-earlier period. Even though Gap has made some headway in trimming its bloated inventories, and is keeping expenses down, Morningstar stock analyst Mike Porter thinks the stock is still overvaluedFour-star Limited  (LTD) is a much better investment choice in this sector, Porter said.

If you thought investing in a balanced fund, which combines investments in stocks with relatively staid bonds, would mean less volatility, you'll be shocked at what Morningstar's director of fund analysis Russel Kinnel found when he surveyed this group's recent three-year track record

Are you desperately looking for signs of a tech rebound?  Well you won't find any at Janus, the Denver-based mutual fund company that rode the mighty tech boom with a bevy of tech-focused mutual funds (Click here to get a Morningstar Fund Family report on Janus). Morningstar senior analyst Christine Benz wrote Janus seems to have lost faith in some big-name tech stocks, according to recent Securities and Exchange Commission filings. 

By simply increasing the returns it expects to receive in coming years on its invested pension plan assets, IBM (IBM) managed to boost its reported pretax income last year by $200 million. Sound fishy? Morningstar's director of stock analysis Pat Dorsey highlights a couple other companies that goosed their reported incomes the same way, and explains what might happen if these rosy predictions don't come true

Day-by-Day Coverage 

Monday: Analog Devices, Xerox, Cendant, Ford, AOL Time Warner.

Tuesday: Best Buy, Home Depot, Deere, AOL Time Warner.

Wednesday: Enron, Abercrombie, Network Appliance, Alltel, BEA Systems.

Thursday: Ciena, Brocade, Estee Lauder, Schwab, Enron, Comverse.

Friday: Dell, Ford Motor, Gap, Scientific-Atlanta, WebMethods.

Frank Stanton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.