The Market Pendulum Swings Back Toward Fear

Jim Jubak MSN Money April 3, 2012

4/2/2012 7:50 PM ET

By Jim Jubak

At the end of a good first quarter, economically sensitive stocks started to fade. It could be a scary time to invest, but there's a sector that's a big exception.

A funny thing happened on the way to the end of the first quarter.

After leading the stock market for most of the quarter, cyclical stocks started to lag the Standard & Poor's 500 Stock Index ($INX).

Is this a sign of what we can expect in the second quarter, as worries about economic growth take the steam out of profits for stocks that follow the economic cycle? I'd say so. I think we're seeing the first signs that the pendulum, which swung to optimism and drove this rally, is swinging in the other direction.

Let's start with some numbers. On the performance data, there's little doubt that cyclical stocks -- companies that recover when the economy does and that falter when the economy stumbles -- started to fade in the last month of the quarter.

The S&P 500 returned 12.4% for the quarter and 3.29% for the month of March.

Can the 2012 rally keep going?

But in the very cyclical auto sector -- what rises and falls with the economic cycle more than car sales? -- General Motors (GM) was up 26.54% for the quarter but down 1.42% for the month. Ford Motor (F) didn't dip into negative territory in the last month of the quarter, but the shares followed a similar pattern, up 16.4% for the quarter but up just 0.77% in March. Auto supplier BorgWarner (BWA) gained 32.32% for the quarter but lagged the S&P 500 in the last month with a 1.81% gain.

And it wasn't just auto stocks that this trend played out.

Steel-maker Nucor (NUE) was up 9.46% for the first quarter but down 0.49% for March. (The steel sector as a whole was up 9.12% for the quarter but down 4.55% for the month.) Construction and mining equipment producer Caterpillar (CAT) was up 18.08% for the quarter but down 6.73% for the month. Diesel engine maker Cummins (CMI) was up 36.83% for the quarter, but down 0.44% in the last month. Titan International (TWI), which makes tires for construction, mining and farm equipment, was up 21.56% for the quarter but down 4% for the month.

Jim Jubak

I think you get the idea. The Morgan Stanley Cyclical Index ($CYC) was up 15.8% from Dec. 30, 2011, though the close on Feb. 29. But in March, the index managed just a 0.45% gain against the 3.29% gain by the S&P 500. Membership in the Morgan Stanley Cyclical Index includes Alcoa (AA), Caterpillar, Johnson Controls (JCI) and US Steel (X).

Why the stumble in what had been a great quarter for cyclical stocks? Because cyclical stocks are by definition stocks most sensitive to the ups and downs of the economy. They're the most susceptible to worries that the economy is about to slow. And the end of the quarter saw the return of those worries by the bushel.

The eurozone looks headed for a deeper recession than originally forecast. High oil prices have raised fears that the U.S. economy will slow. Manufacturing and export numbers show that China's economy is slowing, and corporate profits in China are moving lower.

So it's no wonder that cyclicals had a rough time in March. Add in profit-taking after the gains recorded by some of these stocks in the first two-thirds of the quarter and worries about earnings growth in the reporting season (which starts with Alcoa's earnings release, after the New York markets close on April 10). Alcoa can stand as a representative of what investors fear they'll hear from cyclical stocks in the quarter: The Wall Street consensus is looking for Alcoa to report a loss of 3 cents a share for the quarter, compared with earnings of 28 cents a share in the first quarter of 2011.

Waiting for some good news

In general, I don't see much to tempt me to put money into cyclical stocks before earnings season and the macroeconomic news from Europe and China answer a few questions about growth.

In the United States, we get the March jobs numbers on Friday. Right now, economists are looking for the economy to have added 200,000 jobs in the month. While that would keep the economy's string of 200,000 or better months alive, it would also be a decline from the 227,000 added in February.

Near the end of the month, on April 27, investors will get the initial read on first-quarter growth of gross domestic product. The U.S. economy grew at a 3% annual rate in the fourth quarter, up from a 1.8% rate in the third quarter. The fear now is that high oil prices and the impending recession in Europe will cut into that growth rate.

We simply don't know.

Equally, I think we'll have a better understanding of the macroeconomic picture in Europe and China by the end of the second quarter, on June 30. Rising interest rates in Spain took the yield on the 10-year government bond to 5.4% at the close on March 30. That's still well below the 6.5%-plus level that signaled crisis at the beginning of the year, but it is significantly higher than the yield in early March of just below 5%.

The problem for Spain and the eurozone is that every investor who can do basic math knows that the expansion of the euro rescue fund agreed to on Friday isn't enough to meet current commitments and rescue Spain if the country needs a Greek-style restructuring or even an Ireland-style bank rescue. Spain's tough, tough budget for 2012 announced on Friday, with 27 billion euros ($35.9 billion) of additional spending cuts and tax increases, won't deliver the 5.3% of GDP budget deficit for 2012 that Spain has promised if the nation, along with the rest of the eurozone, sinks into recession.

How do we know that? Two "secret" reports by officials in the European Union, leaked to news organizations after being distributed to the finance ministers on Friday, say so. Despite 1 trillion euros ($1.3 trillion) in loans from the European Central Bank to European banks, "contagion may . . . re-emerge at very short notice," says one of the reports. The second report says very bluntly, "The euro crisis is not over."

Some very big money has started to react to that rather pessimistic scenario. Norway's sovereign wealth fund, which owns a whopping 2% of all European stocks, has recommended cutting its exposure to Europe to 40% in bonds (from 60%) and 40% in stocks (from 50%). The move has to be approved by the Norwegian government, probably in early summer, before the fund can lighten up its European positions in favor of increased investment in the United States and emerging markets. (Given increased cash flows into the sovereign wealth fund from higher oil prices, fund managers say they will be able to rebalance the fund without significant selling of existing assets.)

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I met my BF through ~~--ａgｅd ａ Tｅ ._C`ΟΜ.~~ a nice place for younger women and oldermen, or older women and younger men, to interact with each other! , he is almost 12 older than me ,but we think we did find the true love .BTW,Ever feel that you would best enjoy someone who is not in your age group? Free of the embarrassment and annoyance, go for what makes you really happy.If u are really interested in it, maybe u wanna check it out or tell your friends.'

I think what crashed the market in truth for today was Osam bin presidente's warning to the supreme court not to overturn his healthcare bill. sounds like a direct order from the ceo so who would slap the hand that butters there bread. Anymore our supreme court has less power then adlof obama. and yes when the price of gas goes up factories are going to cut back becuse there orders have been cut back.

the money well is running dry again.

0 0ReportSpamFed EX1 hour ago

Prediction for the day............

After the phenomenal run-up we've had in the first Quarter, stocks do in fact close lower for the day.....maybe close to triple digits on the DJ.

And then, Anthony Mirhardawi(sp) will come crawling out from under his rock, fully armed with his glorious charts, to inform the great unwashed (us) that this REALLY IS the time when stocks are going to tank out. Anthony, your absence has not gone un-noticed. You lose credibility when you head for the hills every time the market rallies.

1 0ReportSpamsburrows632 hours agoGasoline prices ARE the biggest drain on the American economy right now. Anyone that does not believe that earns more than 100K a year 4 1ReportSpamsburrows632 hours agoNo it won't be a "fear factor" it IS GOING TO BE because of UNREGULATED OIL and GASOLINE PRICES 1 1ReportSpamcolorado cowboy2 hours agoCommon sense should if nothing else..........No ethics or fundamentals in the current market. 2 0ReportSpamDuca Contadino3 hours ago

Well, Willow... the voting public actually needs to do something different - like not vote for candidates of the two major parties.

The two parties are the problem, not any one or any number of the politicians (since they belong to the parties).

The two parties have formed a symbiotic relationship wherein they simply take turns being the parasite.

There is no reason for them to do anything differently as we continue to vote for them.

You want them to change?

Change THEM... and, as I said, that does not mean simply this time vote for the opposite party you did last time (as most people mainly do). This time...

... do something really different... and make a real change!

It's all up to you. If you want something different, YOU do something different.

Otherwise, you're just a part of the problem.

6 0ReportSpamWillowInTheWend4 hours agoIf you want to see different results you have to do something different. So far I haven't seen anything new from our government; no job creation, no pride in America, no efficiency or accountability. Just more of the same; slap a band aid on the problems, keep secrets, letting those with $ (super pacs (sic)) pick our next president, and say that we need more government to make it all better. Without trust there is no security. 23 0ReportSpama change of reason4 hours agoWhat is the "sector that's a big exception" as noted in the sub-headline? Wasn't mentioned in the article! 2 0ReportSpammomgam8 hours agoThe rally will fall due to high gas prices. Min. wage earners cannot afford to get back and forth to work. 33 0ReportSpamTheprophetofprofit.13 hours agoThank you, Jubak for presenting the case for a likely scenario based on fundamental markers and not irrational exuberance by someone hoping for an outcome in Novembers election. (See below). 26 0ReportSpamKOO16 hours agocnbc today was all about how to make money in the stock market in the future not doom and gloom reporting without a purpose. They talked about stocks like disney that have China exposure and agricultural stocks. Could you try reporting something positive instead of reporting leaked rumors from unknown sources... 2 22ReportSpamKOO16 hours ago

Jubak, I watched CNBC today and none of this was mentioned. Just positive stock market love with a hint of small correction coming because we are overdue for one. Why do you always reach for a big ol' slice of doom and gloom whenever the market outperforms? I mean you do this every time!! I bet you write something negative on Friday too when the jobs report number is great. Sorry, Jubak, but despite all of this President Obama is still going to win re-election by a landslide and the stock market will be significantly higher by 2013 because of his policy of pulling us back from the brink of a Bush depression.

11 48ReportSpamACOWA16 hours agoLet's see if the US$ can hold the 200 day SMA test. 0 5ReportSpamusual suspects18 hours agoRebalance my fund. 14 1ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment?/**/ DATA PROVIDERS

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In general, I don't see much to tempt me to put money into cyclical stocks before earnings season and the macroeconomic news from Europe and China answer a few questions about growth.

We simply don't know.

The Market Pendulum Swings Back Toward Fear

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