Well, the government workers may be back on the job, but it looks like its going to take a little while longer before we get back on the advertised schedule for the release of economic data. None of the reports due today have been released, and the archives don't show any of the stuff that was supposed to come out last week. So, I'm going to talk today about another way that you might use information about the economy to help in your investment decision making.

From time to time in these articles I have referred to the 1990-91 recession. Recession periods are typically rough times for the general stock market. In the latter half of 1990 the DJIA declined 16.1%, the S+P 500 lost 15.8%, and the Nasdaq Composite dropped by 26.9%.

During recessionary periods some types of stocks perform worse than the averages and some perform better. For example, during 1990 Ford Motor declined approximately 40%, while Johnson and Johnson gained about 32%. [These numbers are approximate because I am taking them from the logarithmic long term charts that appear in Value Line. The scale of these charts is rather small, so it is difficult to make precise readings.]

During 1990 the stocks of most auto companies performed relatively poorly and the stocks of most medical supplies companies performed relatively well. What accounted for these industry-to-industry variations? It all came down to whether the consuming public felt that it could postpone the purchase of the products of an industry. When business is slow, unemployment is rising, and you're getting a headache over how you are going to make ends meet, you'd be more likely to be taking a couple Tylenol and less likely to be purchasing a new car.

Stocks that do better than average during economic hard times have come to be called defensive stocks. They are also sometimes referred to as consumer non-durables. Stocks that rise and fall with the expansion or contraction of the economy are known as economically sensitive or cyclical stocks. When you are selecting stocks for your portfolio you might want to determine whether the companies you are considering are defensive or cyclical. If the economy is just coming out of a recession then you might get more bang for your buck with cyclical stocks. On the other hand, if the economy is slowing, you might want to consider stocks with defensive characteristics.

How do you find out whether a stock is cyclical or defensive? It's easy. Just go by your local library and haul out their copy of the Value Line Investment Survey. Value Line divides the stocks it covers into 97 different industry groups. Look up your stock in the Summary and Index section and then go find its page in the Ratings and Reports section. The price chart on your stock's page shows the 1990-91 recession as a shaded area. You can check to see what your candidate stock did during that period. The price chart also contains a plot of the the stock's relative price strength compared with all the other stocks covered by Value Line. If the relative strength plot was sharply upward during the recession, the stock is a defensive stock.

To be doubly sure of what to expect from your stock during a recession you should page to the front of the section containing the stock. This will bring you to a page that analyzes your stock's industry group. In the lower right hand corner of this page is a seven-year plot of the relative strength of the industry compared to all the stocks covered by Value Line. If the relative strength line sloped upward during 1990, the industry has defensive characteristics. The steeper the slope the more defensive the industry.

Last June I had some money to invest. The Fed had been merrily raising interest rates for the preceding fifteen months and the leading and coincident economic indicators were either flat or trending downward. Were we heading for a soft landing or a crash? Whatever the case, we were certainly not expanding out of a recession. So, I put my funds into five defensive stocks that I judged to be financially solid with above-average growth potential. Today, those stocks are all up, and the five-stock portfolio is showing an annualized gain of 44%. So, I'm not just talking theory here. This stuff really works.

Byline: Lafferty (MF Merlin)