Any neurologist can tell you what happens when your brain's visual and interpretive centers fall out of synchronization. You get the overwhelming feeling that you've met someone, seen something, been somewhere before. It's called deja vu, and anyone who's ever had it can tell you it's a very persuasive, if not necessarily reliable, sensation.
Well, you don't need to be a brain surgeon to know that the technology and cyclical sectors are seriously out of sync. The bifurcation of those groups has been a market fact for a long time now. But this year has brought a whole new world of pain to a wide range of heavy equipment, paper and chemicals stocks. In fact, the two-month beating they've taken has them sitting conspicuously close to where they were just before last spring's big rally.
Ready to Rise Again?
Are we on the verge of another massive rotation out of tech and into the market's beaten-down stocks? It seems few on Wall Street believe in deja vu.
"These stocks, have they gotten cheap?" asks Jeffrey Applegate, chief investment strategist,
. "Yes. Can they get cheaper? Sure."
There are a lot of little fundamental reasons why things may be different this year for the cyclicals. To begin with, last year's cyclical rally -- the
Morgan Stanley Cyclical Index
surged 28.4% between Feb. 24 and April 10 -- was accompanied by what seemed to be an unambiguous rebound in global demand, which promised a heap of long-deferred capital spending on things like tractors, steel and lumber. But the Asian recovery looks much more tentative now than it did in those days.
Cyclicals also had earnings on their side last spring. First-quarter 1999 earnings for
cyclicals were growing 20% on soft year-over-year comparisons. This year, first-quarter earnings growth is expected to come in around 9%, according to
First Call/Thomson Financial
. And earnings revisions aren't coming in any particular rush, either.
But the most notable difference between now and last spring lies with most observers' assessment of the nature of the interest-rate environment. Back then, the fed funds rate stood at 4.75%, and there was no clear consensus that it was inexorably heading higher. Now, nearly everyone agrees that rates are working against stocks, especially low-growth stocks that have to go to the bond market, rather than the equity market, for financing.
goes on hold, I imagine breadth will improve," Applegate says. "I suspect we just don't have the preconditions for sustainably good breadth, even after a market trough."
Listen to What the Market Says
Revenue growth and the use of equity financing aren't the only reasons technology stocks have managed to prosper in a hostile interest-rate environment. There's also the matter of share momentum.
It's not difficult to choose between a 6.5% yield on a two-year note and a 300% annualized return on equity. But bond yields are more than competitive with a stock like
, which has lost about 19% of its value over the last 12 months.
"A lot of these stocks getting beaten up on the downside are hitting some very solid fundamental valuations that, traditionally and historically, people should be buying at," says Brian Belski, chief investment strategist,
George K. Baum & Co
. "But people recognize that the market is going elsewhere."
And so people will follow the market, and so long as its broad trends remain intact, they'll do well. Those who doubt the cyclicals' ability to rise again will gladly point out that last year's rally ultimately amounted to nothing more than a massive head fake. Sure, those who jumped on the cyclical train in March made themselves a pretty penny -- provided they sold in May.
"My test for deciding whether I'd like to buy this group," said Thomas McManus, equity portfolio strategist at
Banc of America Securities
, "is if it goes up 10%, would I still want to own them? In a group like this, which can go down and down and down for a long time, you can lose a lot of money trying to find the right value point to get in.
"Sometimes it's better to just keep your finger on the pulse of the market, and let the market tell you when to get in. In other words, buy them when they're up, not when they're down."
Not exactly the typical value investor's credo. But the stock market keeps telling the same old tale. Witness Thursday, when the
Nasdaq Composite Index
rose 67.3, or 1.5%, to a record 4617.6. The Morgan Stanley Cyclical Index fell another 7.8 points, or 1.6%, to 476.68.