Reason for 'Cyclical' Stock Gains Debated

Are "cyclical' stocks foretelling that an economic rebound is on the horizon?

The relative strength this year of shares of many companies whose fortunes are tied to the economy's swings has surprised analysts.

Some contend that gains in classic cyclical stock sectors such as retailing, autos and railroads suggest that an economic revival is on the way--or, perhaps, that a recession was never a high probability.

That view was reinforced Tuesday after the Conference Board reported a jump in its monthly consumer confidence index.

Other Wall Street pros, however, say part of the demand for cyclical stocks is from investors fleeing technology stocks and unsure where else to put their money.

Still, those investors could have opted for drug, utility or other so-called defensive stocks. Instead, those sectors have fallen sharply while many cyclical sectors have risen or suffered only modest declines.

"Investors have started to take more risks this year and have gotten less defensive" in their stock-picking, said Hugh Johnson, chief investment officer at brokerage First Albany Corp. "It's hard to believe, but it's true."

The strength in cyclical stocks is reflected in some key indexes:

* Standard & Poor's index of 76 companies whose businesses are tied to consumer spending trends has inched up 0.8% this year and is up 18% since bottoming Oct. 12. Stocks in that index include General Motors, Wal-Mart, KB Home and Mattel Inc.

By contrast, the blue-chip S&P 500 index is down 10.5% this year and about the same percentage since Oct. 12. The tech-heavy Nasdaq composite index is down 20% this year.

* A Merrill Lynch index of 27 industrial-cyclical stocks, including Dow Chemical, International Paper and USX-U.S. Steel, has gained 25% since bottoming in September, and this year is off 5.3%, about half the loss of the S&P 500.

Some analysts say cyclical stocks' relative strength this year partly stems from their under-performance through much of the tech-stock fervor of the late 1990s.

Also, many cyclical stocks were decimated while the Federal Reserve was raising interest rates from mid-1999 to mid-2000 to slow the economy.

Now, with the Fed cutting rates, it makes sense that investors would be willing to bet on the economy eventually rebounding and, with it, rising purchases of everything from earth-moving equipment to toys, cyclical stocks' fans say.