Certain cyclicals are best bets for a soft landing
Cyclicals are back!</br></br>Beaten down in the second half of 1994 by rising interest rates and fears of a sharp slowdown this year, economically sensitive stocks have rallied twice in the first two months of 1995. The latest recovery, which started this month, is a clear bet by some investors that the Federal Reserve will be able to engineer a soft landing, slow economic growth coupled with continued low inflation.</br></br>"Investors are concluding that sometime in '95, the Fed will be done tightening and that there will be a resurgence in the economy late this year or perhaps in '96," says Thomas McManus, market strategist at Morgan Stanley. "Some of these [cyclicals] are the stocks that did the worst in '94."</br></br>Weathervanes of the economy, cyclicals rally on economic recoveries but trail in recessions. The group includes paper companies, auto makers and auto-related companies, as well as capital goods and intermediate-goods suppliers.</br></br>The Morgan Stanley Cyclical Index shows an upsurge in February, which comes on the heels of a sharp decline during the second half of January. The index had a steady decline in the second half of 1994, culminating in a 52-week low of 273 on Nov. 23. It then made a first run at a comeback, climbing to 305 on Jan. 15, before skidding sharply. The Federal Reserve's move to boost short-term interest rates by an additional half percentage point on Feb. 1 was widely perceived as the last tightening for the foreseeable future and just the touch needed to bring the economy gliding down gently to more sustainable growth levels.