NEW YORK -- In recent weeks, the hotshot Nasdaq composite index and the venerable Dow Jones industrial average have given Wall Street a classic matchup of the new economy vs. the old. Investors tossed money from one index into the other as they tried to guess which stocks would best weather rising interest rates.
This past week, a less flashy competitor raced ahead. The Nasdaq and the Dow both flourished, but the only new records on the books were set by the Standard & Poor's 500.
Most Wall Street analysts consider the S&P 500 the best gauge of the stock market's strength. The index is a broad palette of 500 of the largest companies across a dozen or so industry groups, offering a more comprehensive view than the 30-stock Dow or the technology-laden Nasdaq.
The S&P 500 set new records in four consecutive sessions this past week, closing Friday at 1,527.46, a gain of 62.99 points. The index is up 4 percent in the year to date, compared with a 22 percent gain for the Nasdaq and a 3 percent loss for the Dow.
The resurgence of the S&P 500 illustrates the breadth of the market's most recent rally. It's also a welcome reward for investors who have shunned sector-specific investing in favor of the broad portfolios that come with S&P 500 index funds.
''The rally is really broadening out,'' said Alan Ackerman, senior vice president at Fahnestock & Co. in New York. ''There's a much better balance, and the market is returning from its flights of fancy to reality.''
Perhaps the strongest catalyst for the recovery of the broad market was the Federal Reserve's announcement Tuesday that it would raise interest rates for the fifth time since last June.
Higher interest rates, of course, are bad for stocks. They boost the cost of borrowing money, making it harder for companies to finance growth without lowering their profits. Higher rates can also raise the appeal of investments like bonds, drawing money away from the stock market.
The Fed hasn't given any indication it's done raising rates. But with a handful of economic reports showing signs of slower economic growth, many investors were willing to bet that only one or two more increases are in the cards.
''People who were sitting on the sidelines are putting money to work now that the Fed is out of the way,'' Ackerman said.
A sense that the Fed is almost finished has allowed investors to return to the broad market, without fear that one particular sector will bear a heavier burden of higher rates, said Sam Stovall, senior investment strategist at Standard & Poor's, the financial company that created the S&P 500.
''Now we can not only embrace tech stocks, which were seen as defensive in a rising interest rate economy; we can also go back to the old economy stocks,'' he said.
Nonetheless, the success of the S&P 500 this past week came largely from high-tech stocks.
In recent years, technology companies have taken on greater weight and presence in the index. Currently, tech stocks represent 35 percent of the S&P 500, up from 20 percent last year, Stovall said.
The S&P 500 is weighted, with the largest stocks carrying more influence than the smaller ones. This past week, the three largest stocks -- Microsoft, General Electric and Cisco Systems -- all rose, propelling the index to its new records.
In the coming weeks, however, some less glamorous components of the index could maintain its strength, Stovall said. Now that interest rate worries have ebbed, investors are free to look ahead to first-quarter earnings reportings.
Stovall estimates the companies in the S&P 500 will report average profit growth of 15 percent from the first quarter of 1999. The top-performing sectors, he said, will be energy, technology and basic materials, which includes chemical, metals and paper companies.
Brainerd Dispatch ©2013. All Rights Reserved.