Stronger economy drives up cyclical shares

NEW YORK MARKET

THE SAME economic boom that's causing a slump in financial shares is giving a boost to mining companies, oil drillers and chemicals makers.

Such so-called cyclical stocks - those most closely tied to the US economy's ups and downs - are beating the Standard & Poor's 500 index this month amid renewed demand for products and services around the world. Investors expect the gains to persist into the new year as global economies improve.

Since the Thanksgiving holiday on 25 November, the Morgan Stanley Cyclical index has risen 4 per cent - 14 times better than the S&P 500's 0.3 per cent gain. USX-US Steel Group led the advance with a 24 per cent gain, together with Alcoa, up 21 per cent, and Georgia-Pacific, up 20 per cent.

"Folk are optimistic about the domestic and global economy and its impact on cyclical companies," said Charles Crane, chief market strategist at Key Asset Management in Cleveland, Ohio. "The valuations are very reasonable."

Mr Crane, who holds shares in Dow Chemical, International Paper, Navistar International and Deere & Co, is adding to his holdings of cyclicals.

The stocks could steal some of the thunder from computer-related shares in the first part of next year, Mr Crane said, in a "possible rotation into cyclicals and out of some of the high-flying technology stocks".

Computer-related shares make up 53 per cent of the Nasdaq Composite index, which has risen 9.7 per cent since Thanksgiving. The Nasdaq is up 72 per cent on the year to date, on course for the largest yearly gain in its 28-year history. The Dow average is up 23 per cent and the S&P 500, 16 per cent.

Financial stocks, by contrast, are taking a beating. Bank stocks in the S&P 500 index have fallen 20 per cent since 16 November, when the Federal Reserve last lifted interest rates, prompted by concern that the economy is growing fast enough to quicken inflation. Interest-rate changes typically take about six months to affect the economy.