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Prospect of More Fed Hikes Making Retail and Financial Stocks Mopey

You'd think with a 6.9% increase in GDP, there'd be more life in these traditional bellwether sectors.

SAN FRANCISCO -- Last week, fourth-quarter


was revised up to 6.9%, an incredible pace for any economy, much less a "mature" one like America's. The ironic thing (and it may be heretical to say this) is that even as the economy steams along at an incredible pace, stock groups such as retailers and financials have been acting as if a major economic slowdown -- perhaps even a recession -- is coming.

So I set out to determine what Hugh Johnson of

First Albany

(among others) refers to as the "message of the market" and (hopefully) help investors decipher Wall Street's latest



Retailers and financials have traditionally been accurate forecasters of future U.S. economic activity, and their recent performance is at odds with current economic data. Accompanying the robust GDP figures, unemployment remains around 4%, retail sales were up nearly 9% in 1999 vs. 1998 and consumer confidence is high (repeat: consumer confidence is high). Thus, you'd think these would be the salad days for these groups -- especially retailers. Except they're acting more like overcooked broccoli (bland, mushy and disgusting, that is),

today's mini-revival notwithstanding.

Are You Trying to Tell Me Something?
One-year charts of the Philadelphia Stock Exchange/KBW Bank Index and S&P Retail Index

Reflecting the damage in industry proxies (heck, causing it) have been severe year-to-date declines among retail and financial industry leaders, such as


(WMT) - Get Walmart Inc. Report

, which was down nearly 35% year to date before rising 3.8% today. Similarly,

Home Depot

TheStreet Recommends

(HD) - Get Home Depot, Inc. Report

was off 23% since Jan. 1 before rising more than 7% today. Among other consumer-focused names,

Procter & Gamble

(PG) - Get Procter & Gamble Company Report

was down over 22% year to date before today's 3.8% rise.

In the financial world,

American Express

(AXP) - Get American Express Company Report

was off over 25% year to date before rallying 6.3% today, while

Fifth Third Bancorp

(FITB) - Get Fifth Third Bancorp Report

was off nearly 32% before advancing 3.7% today.

The knee-jerk conclusion that these stock groups are forecasting a recession is just that, according to nearly everyone queried on the subject. In unison, they attributed the action to the

Federal Reserve's

increasingly aggressive monetary policy.

Investors "can't be sure how much economic activity will be lost to this latest series of rate hikes," said John Lonski, senior economist at

Moody's Investors Service

, who chalked up the action to a "reality check" among investors who realize earnings growth may slow this year.

The inversion of the yield curve, historically a precursor to recession, is also causing investors to flee economically sensitive groups, added Beth Cotner, chief investment officer for large-cap growth at

Putnam Investment Management

. But most observers (Cotner included) agree the curve isn't fully inverted and the inversion at the long end is due largely to the expected reduction in supply of 30-year bonds.

So what gives with these stocks?

Lisa Cullen, equity strategist at

Merrill Lynch

, said the economically sensitive groups are reflecting the "weird environment" on Wall Street.

"There isn't a fundamental reason" for the weakness in many stocks "other than their earnings growth doesn't look interesting enough to investors," she said. "Growth investors are not interested in holding anything but tech."

The rush into only the fastest-growing names has resulted in a vicious cycle for value fund managers, who've found themselves having to meet redemptions by selling stocks already in retreat. Their sales then exacerbate the losses, thus prompting more investors to cash out. (And so on and so on.)

That technology stocks are not directly impacted by interest rates hikes has been widely

proffered as a justification for the

Nasdaq Composite's

huge outperformance vs. blue-chip averages this year (and last). But a growing number of market players acknowledge tech names will struggle if their corporate clients who are exposed to interest-rate hikes have to scale back expenditures.

If there's no recession coming -- or major economic slowdown -- groups such as retailers and financials should rebound from what Cotner calls "historic lows by whatever metrics we use."

Cotner, who's also lead manager of


Putnam Investors fund, said the fund group has been "adding selectively" to a number of economically sensitive stocks.

She declined to specify, and instead offered examples of stocks with "good fundamentals that have been hit hard" and which Putnam is long. They include retailers such as Wal-Mart, Home Depot and

TJX Companies

(TJX) - Get TJX Companies Inc Report

, as well as financials such as

Providian Financial


and Fifth Third.

But "I don't think you want to buy with both hands," she said, recommending investors look for further weakness rather than buying on days when they show strength, like today. "I don't think these stocks will outperform until after the last rate hike."

Which brings us back to the big conundrum facing many professional investors. If there's no recession or big slowdown coming, then maybe some of the economically sensitive stocks are attractive. But continued economic growth will continue to benefit tech stocks, where most investors remain tightly focused.

But "short-term players are not married to tech per se. They're married to tech because that's where money is being made," argued Barry Hyman, chief market strategist at

Ehrenkrantz King Nussbaum

, who also believes there's no recession in the offing. "Show a short-term player some volatility in Procter & Gamble or American Express, and they're right there."

Still, it's hard to imagine P&G being caught in the throes of chat board frenzy.


The clock on the wall and the word-count tool say I need to wrap this up. But I'd like to return to this issue soon because there's a whole other layer to this cake (at least one). That is, whether

Alan Greenspan

& Co. are taking the potentially deflationary impact of the Internet into consideration as they prepare for another round (at least one) of rate hikes, and how much the price gouging on the Net is affecting "old economy" companies.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at