Wall Street cycles ahead

Cyclical sectors pedaling to gain favor

The few stocks that have driven Wall Street to new records this past year - largely technology and Internet companies - have now become a few more stocks, as the market shows welcome signs of broadening.

The experts call it a market rotation.

Chemical companies, aluminum factories, machinery manufacturers, paper firms, to name a few, have begun showing signs of new life.

These are the "economically sensitive stocks," or "cyclicals." Many of them are value companies, where price-earnings ratios are low and future profits are considered hidden. Most of the action in the last year or so has focused on growth stocks - Microsoft, Intel, IBM, and General Electric - big companies expected to deliver big growth in profits. These are the large-cap companies riding the current economic momentum.

But for most investors, it's not labels that matter but the impact of the rotation on pocketbooks.

With more companies now posting the likelihood of continuing growth - say 70 or 80 companies instead of 50 - there is far less reason to fret that the bull market, now in its 17th year, will sink into a protracted downturn soon.

Despite the shifts, the market still bears good tidings for the high-tech and Internet crowd.

Technology may have lost some sheen in recent weeks. But the sector, last week, regained its thrust. In fact, large-cap growth stocks, including technology, are again so dominant that some experts wonder whether the shift to cyclicals may soon lose steam.

Regardless, the dynamics of the market seem different, stock technicians say. "There has definitely been a shift in the market," says Greg Nie, chief market technician for investment house Everen Securities, Chicago.

Mr. Nie believes that the moves away from some technology stocks to the more industrial companies would look even more pronounced if portfolio managers, particularly for mutual funds, had more money to invest. But most are already fully invested, with little cash on hand.

To buy the cyclical stocks they would have to sell existing companies, something they are loath to do, says Nie.

Even with the pullback of the Dow Jones Industrial Average in March, Nie believes that the index will stride past 11000 soon, followed by a period of profit taking in a modest correction. But then it will again start upward, late in spring or early summer, he says.

"Look at the major indexes," says Bryan Piskorowski, market analyst with Prudential Securities. "The rise in the Dow is making a statement," he says.

The Dow is far more concentrated than other market indexes in the older industrial-cyclical sectors.

The 30-stock Dow is now up more than 16 percent for the year, compared with a little over 10 percent for the Standard & Poor's 500 Index, a much broader, less industrial measure of the market.

Moreover, the market for stocks of smaller companies, measured by the Russell 2000 Index, shows new vigor, up 2 percent for the year, most of that advance in April.

"It is not so much that there has been an outright shift, or rotation to cyclicals, as that there has been a broadening of the overall market," says Mr. Piskorowski.

He cites, in part, the "pickup in global economic demand," as economies of Asia and Eastern Europe swing back to normal from last year's sharp downturn.

Still, many money managers assume that the large-cap/technology stocks of the the S&P 500 will stay in the driver's seat.

"One week [of ascendancy by cyclicals] doesn't mean a rotation," says Rich Sichel, managing director of Bryn Mawr Trust Co., in Bryn Mawr Pa.

For cyclicals to take the lead, he says, the economy would have to be much stronger - which could also bring a jump in inflation. Barring that, he says, large-cap growth stocks should remain on top.

"I don't see any major shift away from large-cap growth stocks," agrees Peggy Farley, head of financial firm Ascent Asset Management, here.

But she notes that the small-cap sector is starting to come back. Many of these smaller firms have a technological bent, she notes, singling out two examples - Ansys, a high-tech firm, and softwaremaker Small Worldwide.

For investors looking for direction, experts recommend:

*Hold at least one small-cap mutual fund. A growth small-cap fund would take advantage of continued US economic growth. A value fund would tap into cyclicals. Most growth funds have outperformed value funds in this market (for an exception, see Mutual Fundamentals on page 16).

*Own a total stock-market fund linked to a broad index, such as the Wilshire 5000, which comprises most US stock companies, says Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter published in Irvington-On-Hudson, N.Y. Such an index fund will reflect upward shifts in diverse sectors, including growth, value, large-cap, and small-cap firms.

*Hold a large-cap value fund, such as Vanguard Windsor, which owns manufacturing and economically sensitive companies.