The Party's Over for Cyclical Stocks

Top Consumer Stocks For 2014

Regardless of how or when the crisis in Washington ends, MoneyShow's Howard R. Gold believes it's become the right time to ease-up on stocks in the sensitive sectors.

No matter how the government shutdown and debt-ceiling debate are resolved—and they will be—the US economy is likely to plod along.

The 2008-2009 recession ended nearly four and a half years ago, but job growth remains anemic, while personal income has stagnated.

The Federal Reserve's expansive monetary policy—buying $85 billion worth of bonds each month—hasn't helped much. So, even if Fed chair-designate Janet Yellen is confirmed, it's unlikely more of the same easy money policy will produce better results.

Read Howard's analysis of why QE3 was a sign of failure on MoneyShow.com.

Those harsh realities, along with comments by a leading CEO at a conference I attended last week, have led me to conclude that it's time to lighten up on cyclical stocks, the economically sensitive sectors that have been such stalwart performers in a bull market now well into its fifth year.

The CEO was Terry Lundgren of Macy's (M), the nation's second largest department store chain, with 850 outlets throughout the US and 90% of the company's revenues coming from those Macy's stores, which serve middle-class Americans. (High-end retailer Bloomingdale's accounts for 10% of sales.)

"What's turned against us is what's turned against retail," he told journalists attending a conference of the Society of American Business Editors & Writers (SABEW) in New York.

"The consumer wasn't spending in the second quarter. The higher income consumer has bounced back. That mid-tier consumer is under stress."

"There's just not enough job creation going on," he concluded.

Lundgren's sober assessment is reflected in Macy's stock performance: It's off 15% from its all-time high above $50, which it hit in July. That followed an astonishing bull market rally of 865% from the lows, just above $5, in the depths of the financial crisis.

Macy's isn't alone. Apparel retailers Urban Outfitters (URBN) and The Gap (GPS) both have had sharp corrections after, respectively, tripling and more than quadrupling from their lows. Teen retailers Abercrombie & Fitch (ANF), Aeropostale (ARO) and American Eagle Outfitters (AEO) have had their clocks cleaned as even teenagers—the canaries in the coal mine of discretionary spending—have tightened their purse strings.

"I see a weak consumer," said analyst Rick Snyder of Maxim Group, who downgraded Macy's stock in August to Hold from Buy. He sees softness in every metric the retail industry tracks—mall traffic, comparable store sales, what have you. "That data has all been weak," he told me.

Asked if he was anticipating a second wind for retailers, he replied, "I don't think so. I think this is going to be a fairly poor holiday season." And he added, "I don't see anything coming next year that's going to turn that around."

The only retail stocks he likes now are high-end emporia like Saks (SKS), which has agreed to a buyout from Hudson's Bay, and off-price retailer Ross Stores (ROST), whose stock has risen 700% from its lows.

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