MARKET SNAPSHOT: Where Are This Cycle's Recovery Stocks?

By Nick Godt

With government spending seen replacing consumer outlays for the foreseeable future, some investors trying to anticipate an eventual economic recovery are turning to infrastructure and materials stocks instead of the usual early-cycle plays.

"As the consumer continues to retrench, this wouldn't be a typical recovery [...] where you see gains in early cyclicals such as housing, retail and auto stocks," said Owen Fitzpatrick, head of U.S. equities at Deutsche Bank.

"The market has gravitated towards some growth sectors that are linked to infrastructure, such as the industrials, materials and energy," he said. Technology stocks also seem to have been a beneficiary, he noted.

So far this year, technology is the best performing sector of the S&P 500 index, rising 6.3%. That's followed by defensive sectors, such as health care and utilities, both up 2.9%, and the energy sector, up 2.1%.

Materials, meanwhile, are one of the "least-bad" performing sectors, falling 0.3%. That sector includes the shares of mining, construction and chemicals firms.

As for the consumer discretionary sector, which includes retailers, home builders and auto manufacturers, it is down 6.2% year to date.

On Monday, stocks ended little changed as details on a bank-rescue plan and a vote on the passage of the $780 billion economic stimulus package were both postponed until Tuesday.

The Dow Jones Industrial Average fell 9 points to 8,270. The S&P 500 index rose 1.3 points to 869, while the Nasdaq Composite fell 0.1 points to 1,591.

Home-builder Beazer Homes USA , a consumer discretionary stock, jumped nearly 20% after it reported a narrower quarterly loss. But its fellow home-builder Lennar fell after Citigroup cut its rating on the stock.

The S&P home-builder ETF (XHB) was down 1.6%. It's little changed year-to-date, after sliding more than 50% last year.

By comparison, shares of U.S. Steel Corp. gained after it said 500 employees have taken voluntary early retirement. And the iShares S&P global infrastructure ETF , which first slumped 10% through January, has gained more than 7% since February started.

Different this time

Stocks tend to try and anticipate eventual economic recoveries from six to nine months ahead of time. And consumer discretionary stocks have tended to lead those pre-recovery efforts, said Jack Ablin, chief investment officer at Harris Private Bank.

"That's been the pattern," he said. "There's certainly been this traditional boost from the early cyclicals that may not be around this time because the cycle has changed."

Since the 1980s, bear markets and economic downturns in the U.S. have been addressed mainly by monetary policy. The Federal Reserve would cut interest rates to levels low enough that consumers and businesses would eventually start to borrow and spend again.

But this time around, the credit crisis has brought lending, along with consumer and corporate spending, to a grinding halt. And although the Fed has already slashed interest rates to near zero, few are expecting the economy to recover without government spending.

Outside of the U.S., hundreds of billions of dollars in stimulus plans have also been announced around the world, notably in China and the European Union.

Besides infrastructure stocks, analysts have noted a recent rebound in some commodities and metals as signaling that the market may be starting to price in some eventual economic recovery.

"There is rotation from the more conservative stocks [...], the foods and more defensive names," said Paul Nolte, director of investments at Hinsdale Associates, in a note. "The rotation is going into the basic materials, technology and the industrial sector which all saw large gains last week."

Whether the market might be getting ahead of itself or not, anticipation of better times ahead has thus far benefited these sectors over those directly linked to consumer spending.

That might eventually change if the market starts betting that the stimulus package will work, and boost employment and spending, according to Hugh Johnson, chairman of Johnson Illington Advisors.

But such evidence might take a long while to really emerge. By turning to sectors that might benefit directly from government spending, be they growth oriented or not, the market might be playing it fairly safe for a while, says Harris' Ablin.

"In our view, the market probably won't start smelling the roses until the second half of the year," he said.