The patient apparently has been prancing about the sick ward this quarter, and reports on the economy and corporate profits for the third quarter are expected to show it in a few weeks. Longer term, the prognosis is not as encouraging, with many economists still expecting a bit of a relapse in 2010 as the United States and Europe remain bogged down with bank troubles and unemployment, and China craves Western customers for its exports.
If that's true, what's an investor to do?
Even the most skeptical strategists and economists are starting to suggest that perhaps investors who keep their eye on the exits might eke more rewards out of the rally that began in March.
For example, with stocks up so dramatically, David Rosenberg, a longtime bear and strategist for Gluskin Sheff & Associates Inc., argues that though stocks "have far too much growth priced in at current valuation levels," the market momentum could carry them higher for a while.
When corporate earnings are reported in a couple of weeks, he expects a lot of companies to show stronger profits than expected.
Despite that, Thomas Lee, a JPMorgan Chase & Co. strategist and self-professed "contrarian," told clients in a recent conference call to wade into riskier stocks.
If investors have fresh money to invest for three to four months, he said, he thinks it is worth betting on cyclicals.
With cyclical companies, he said, an investor can receive "100 percent of the benefit" of a recovery. And Lee said he anticipated a "stronger-than-anticipated economic recovery."
Cyclicals, which could be dumped if growth stalls, are industrial companies or those that make or sell basic materials, technology, or energy - the stuff that growing firms need and confident managers buy if sales start to increase. For example, Lee anticipates UPS Inc. will do well as shipping increases.
In addition, Delta Air Lines Inc. is a pick for the eventual return of business travelers, and Starwood Hotels & Resorts Worldwide Inc. is expected by JPMorgan analyst Joseph Greff to benefit from a recovery in lodging in 2011.
Though recovery could take a while, the expectation is that investors will buy stocks in anticipation of better times, searching for firms in the next few months that have made cuts and other changes to position themselves for a leaner environment. Already, some cyclicals have moved up sharply in price.
Companies that produce building products have climbed 224 percent more than the median performance of cyclical industries, and forest and paper products are 135 percent ahead of the median, Lee said. The biggest laggards since March have been hotels, restaurants, and diversified consumer services.
That does not mean they are cheap. Analysts have been upgrading their expectations for cyclical stocks since June, and Greff, for one, is concerned that lodging stocks have risen too quickly.
Lee said he thought 99 percent of cyclical companies would be profitable in 2010.
History provides mixed messages.
"Whether it is currently time to overweight cyclical or stable stocks is not clear from the historical record," said Wells Capital Management strategist Jim Paulsen. Yet, after the recessions in the 1970s and 2001, cyclicals dominated for years.
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The rocky economy has had an impact on the size, value and bottom line of many of the top 100 companies in the 10-county Philadelphia region, as well as on the total pay of their CEOs.
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