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 cyclicality.

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, homebuilders, 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.

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? 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? 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.

The Hook Slide

"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. He also points out that home builders, typically a good investment early in the cycle, may have already run too high to be worth it anymore. Home builders in the

S&P 500

have run 73% since the Fed's last rate hike in May.

After the 1991 Recession, Cyclicals Outperformed

Source: Baseline

TheStreet Recommends

Classically, home builders would be exactly what you'd want to buy, because they are among the earliest of the so-called early cyclicals -- companies whose businesses rebound as, or maybe a little bit before, the economy does. When the Fed begins to cut rates, the prime rate goes down and more people begin to refinance their mortgages. Typically, a fair chunk of that money gets put into their homes. Consumer cyclical companies, which include retailers and consumer durables, also see their profits rebound early on. Later on, capital equipment companies get a bump and finally late cyclicals, like energy companies and utilities, make a move. But whether this rolling cyclical theme works at all depends greatly on what's happening with the economy.

What's Going On

"If there's been a recession," says

Merrill Lynch

chief quantitative strategist Rich Bernstein, "it's very clear cut that you should look at early cyclicals. If there has not, there's a question if you should even look at cyclicals at all."

From the March 1991 trough of the last recession, for example, consumer cyclicals put on a strong performance, besting the

Wilshire 5000

-- the broadest index of the overall market -- by more than 10% in the following year, according to data-tracker

Baseline

. Yet the Fed had begun easing in May 1989, and the consumer cyclicals underperformed the market in the year that followed that. Consumer cyclicals also underperformed the market in the 12 months that followed the beginning of the 1995 and 1998 Fed eases.

Cyclicals Mostly Underperformed After Fed Easings in 1989, 1995 and 1998

Source: Baseline

"The Fed provides liquidity, but the profit cycle determines the contours of where that liquidity goes," says Bernstein. It doesn't mean that early cyclicals can't post positive returns. There just might be better returns elsewhere.

Rebounding?

One can see how this works. When the economy goes into recession, the profound excesses that existed at the peak begin to get worked off. In retail, for example, America goes from being overstored to understored, paving the way for the next boom. Manufacturers cut the fat out of their operations. As individuals, we reduce debt and increase savings, as well as put off big-ticket purchases.

Obviously, all of these things have begun to happen, but whether they've run their course, or whether they've happened enough, is another matter altogether. And this puts investors into something of a quandary. If the economy is on the verge of rebound, then consumer-related companies, as well as consumers themselves, are not at the place they need to be to drive a big move in the early cyclicals. And if the economy dips into recession, then we're trapped in something like the 1989 situation, where there were a couple of years of pain to come before things got better.

If it really is time to buy cyclicals, says Bernstein, investors would be better off buying midcycle sectors, like capital equipment and tech, or late-cycle sectors. It's worth noting that this jibes with what a lot of economists have been thinking lately -- that though the economy is poised to rebound in the second half of the year, the consumer will remain hesitant.