No matter how the government shutdown and debt-ceiling debate are resolved - and they will be - the U.S. 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.
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 (NYSE:M), the nation's second-largest department store chain, with 850 outlets throughout the U.S. 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 (NASDAQ:URBN) and The Gap (NYSE:GPS) both have had sharp corrections after, respectively, tripling and more than quadrupling from their lows. Teen retailers Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE: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 (NYSE:SKS), which has agreed to a buyout from Hudson's Bay, and off-price retailer Ross Stores (NASDAQ:ROST), whose stock has risen 700% from its lows.
NEXT: Big runs for homebuilders
And it's not just retailers. Travel and dining stocks have had huge rallies as well. Hertz Holdings (NYSE:HTZ) rose over 1,600% from its trough; United Continental Holdings (NYSE:UAL) soared by more than 1,000%, and DineEquity (NYSE:DIN), parent of Applebee's and IHOP restaurants, gained nearly 1,200% from its lows to its recent peak. All have sold off by 15%-20% in recent weeks.
And then there are homebuilders. Lennar (LEN) and Hovnanian Enterprises (NYSE:HOV) have been 1,100% gainers from their bear market lows. Other major homebuilders have merely tripled and quadrupled in price.
But since current Fed chair Ben Bernanke warned this spring that QE3 might not last forever, interest rates have soared, taking mortgage rates with them, and homebuilders' stocks have plunged: KB Home (NYSE:KBH), PulteGroup (NYSE:PHM), and D.R. Horton (NYSE:DHI) have given up more than 30% of their value, while Lennar has lost 24% and Hovnanian 29%, respectively, from their peaks.
That's way beyond a correction; it's bear market territory, suggesting that the huge rally in homebuilders' stocks may be over.
On CNBC last month, analyst Megan McGrath of MKM Partners called the homebuilders a "one-trick pony." "They're really trading off of rates," she said. "They're tradable but not necessarily investable."
Robert Wetenhall, managing director at RBC Capital Markets, told me he downgraded homebuilders' stocks in June. He sees a lot of volatility in the short-run, centering on Fed policy, the government shutdown, and the threat of a debt default.
Echoing Macy's CEO Lundgren, he also sees some chronic problems in the economy. "Jobs aren't being created," he said, and credit availability is a big issue for many prospective home buyers. "The first-time homebuilder is priced out of the marketplace," he said.
Still, he pointed out that housing starts are running at a very depressed 900,000 annually, down from their long-term average of 1.4-1.5 million a year. And there's plenty of pent-up demand. That's why he thinks we're in "the early innings of a multiyear recovery."
Yet he prefers stocks that are "leveraged to increased repair and remodeling activity" - companies like Masco (NYSE:MAS), Fortune Brands Home & Security (NYSE:FBHS) and Mohawk Industries (NYSE:MHK). They've had big runs, too, but he sees more upside there.
Maybe so, but it's obvious that the first movers - many retailers, homebuilders, and other early cycle consumer plays - have had their day. The easy money has been made, and it's time to move on.