Back to Basics

By Daniel Kadlec

The suddenly flush clerks and secretaries, not to mention the even flusher bankers, at Wall Street powerhouse Goldman Sachs Group won't be convinced. But their company's smashing $3.7 billion initial public stock offering last week--spreading wealth up and down the ladder--was less noteworthy than a handful of Internet IPOs that flopped. Say what? Yes, flopped. Shares of online map company Mapquest and online advertising company Flycast failed to double in a day--a stiff bogey but one that Internet companies have been hitting all year. Meanwhile, online real estate company Comps.com actually fell on Day One.

This turnabout points up a broad trend in the market. Dare I say it? New-economy firms are out of favor. Since March 31, the smokestack-vintage Dow Jones industrial average has risen 1,000 points, while the tech-laden nasdaq has gone flatter than steel slab. In that period aluminum maker Alcoa rose a shiny 55% and joined heavy industrials such as 3M and Phelps-Dodge in posting heady gains. Tech wonders, including Cisco, Microsoft and Intel, floundered.

This remarkable shift came without warning, and is a clear illustration of why you should spread your stock bets over many industries. There's just no telling when a group will come into favor, and the biggest payday is reserved for those who are in the stocks before they start to move.

What's behind this shift to economy-sensitive "cyclical" stocks? The U.S. economy appears to be in no danger of slowing, and the world economy may be ready for a coordinated growth spurt. That promises to increase demand for manufactured goods, the equipment needed to make them and the raw materials that go into them. Indeed, commodities prices have been edging higher for a month. Cyclical companies can raise prices in that kind of environment, which makes them far less vulnerable to the dark side of economic growth--inflation and higher interest rates. If rates, which have also been going up, keep rising, it will let air out of a lot of consumer stocks, like Wal-Mart and Merck. Tech stocks would also suffer. Rising rates are terrible for bonds.

This is pure crystal-ball gazing. The cyclicals could easily fizzle along with, say, the Asian recovery. But what if they don't? Now is a good time to review your portfolio. Odds are that you or the stock pickers at the mutual funds you own have grown a little too fond of technology and big consumer stocks. One quick way to judge: look at your portfolio's return in April. Lose money? That's a sign that you may be overexposed to speculation.com A diverse portfolio would include cyclicals, whose com-like gains last month would have offset weakness in the tech-stock darlings.

This is no time to dump tech stocks wholesale. The information revolution will continue to shape the world economy for years to come, and profitable tech companies remain solid long-term holdings. But if you must lighten up on tech to broaden your portfolio, do it. Companies that build tractors, equipment, highways and skyscrapers--left for dead until a few weeks ago--may be in favor for a year or longer. The biggest cyclical names, like Caterpillar, International Paper and DuPont, have already had huge moves but probably still have room to run. Consider also an investment in a Wilshire 5000 or Russell 2000 stock-index fund. Both have a heavy slug of small- and middle-size basic-industry companies, which tend to rally as a group on the heels of the bigger names.

See time.com for more on the market. Dan's new book is Masters of the Universe. See him on CNNfn Tuesdays at 12:45 p.m. E.T.