Economically Sensitive Stocks Buffeted by Cooldown Debate

Jan. 31 -- Write it in blood, cast it in stone, shout it from the mountaintop: When the Fed starts to ease, you've just got to buy cyclicals.

Collectively, that's a message that Wall Street has come to embrace of late. With the Federal Open Market Committee it is just a matter of when, not if, the economy begins to reaccelerate.

As an investor, you want to get in front of that rebound, buying stocks of companies whose businesses wax and wane with the economy. Called cyclical stocks, they include retailers, home builders, makers of consumer durables, like household appliances and cars, and capital equipment makers.

Many areas of technology — particularly those that fall under the rubric of old tech — are considered cyclical because their businesses are leveraged to the companies they supply.

How to Invest?

For many, the issue of when to invest in cyclicality is merely one of timing.

Should you have begun buying the cyclical stocks in the late fall, when it became apparent that the Fed would soon be easing?

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Or was the time to buy when the Fed first moved, with its surprise half-point cut early this month?

Or perhaps the time to make the shift comes later, once one has a better sense of when the economy is going to trough?

Healthy Competition

As a result of these competing views, there's been something of a dogfight in the market, with cyclical stocks outperforming one day, and the stocks of companies that offer steady growth regardless of the vicissitudes of economic growth rallying the next.

"We are looking to increase the cyclical flavor of our portfolios, but I wouldn't say we're diving in head first," says Charles Crane, market strategist at Spears Benzak Salomon & Farrell. "A lot of companies that fall into that cyclical basket just aren't great businesses."

Crane reckons that a lot of tech offers good value here, as do some retailers, but doubts whether many of your grimier capital equipment makers — backhoe manufacturers and the like — are worthwhile investments.