A funny thing happened on the way to the end of the first quarter.

After leading the stock market for most of the quarter, cyclical stocks started to lag the Standard & Poor's 500 Stock Index ($INX).

Is this a sign of what we can expect in the second quarter, as worries about economic growth take the steam out of profits for stocks that follow the economic cycle? I'd say so. I think we're seeing the first signs that the pendulum, which swung to optimism and drove this rally, is swinging in the other direction.

Fading auto sales, steel stocks

Let's start with some numbers. On the performance data, there's little doubt that cyclical stocks -- companies that recover when the economy does and that falter when the economy stumbles -- started to fade in the last month of the quarter.

The S&P 500 returned 12.4% for the quarter and 3.29% for the month of March.

But in the very cyclical auto sector -- what rises and falls with the economic cycle more than car sales? -- General Motors (GM) was up 26.54% for the quarter but down 1.42% for the month. Ford Motor (F) didn't dip into negative territory in the last month of the quarter, but the shares followed a similar pattern, up 16.4% for the quarter but up just 0.77% in March. Auto supplier BorgWarner (BWA) gained 32.32% for the quarter but lagged the S&P 500 in the last month with a 1.81% gain.

And it wasn't just auto stocks that this trend played out.

Steel-maker Nucor (NUE) was up 9.46% for the first quarter but down 0.49% for March. (The steel sector as a whole was up 9.12% for the quarter but down 4.55% for the month.) Construction and mining equipment producer Caterpillar (CAT) was up 18.08% for the quarter but down 6.73% for the month. Diesel engine maker Cummins (CMI) was up 36.83% for the quarter, but down 0.44% in the last month. Titan International (TWI), which makes tires for construction, mining and farm equipment, was up 21.56% for the quarter but down 4% for the month.

Image: Jim Jubak

Jim Jubak

I think you get the idea. The Morgan Stanley Cyclical Index ($CYC) was up 15.8% from Dec. 30, 2011, though the close on Feb. 29. But in March, the index managed just a 0.45% gain against the 3.29% gain by the S&P 500. Membership in the Morgan Stanley Cyclical Index includes Alcoa (AA), Caterpillar, Johnson Controls (JCI) and US Steel (X).

Economic doubt takes control

Why the stumble in what had been a great quarter for cyclical stocks? Because cyclical stocks are by definition stocks most sensitive to the ups and downs of the economy. They're the most susceptible to worries that the economy is about to slow. And the end of the quarter saw the return of those worries by the bushel.

The eurozone looks headed for a deeper recession than originally forecast. High oil prices have raised fears that the U.S. economy will slow. Manufacturing and export numbers show that China's economy is slowing, and corporate profits in China are moving lower.

So it's no wonder that cyclicals had a rough time in March. Add in profit-taking after the gains recorded by some of these stocks in the first two-thirds of the quarter and worries about earnings growth in the reporting season (which starts with Alcoa's earnings release, after the New York markets close on April 10). Alcoa can stand as a representative of what investors fear they'll hear from cyclical stocks in the quarter: The Wall Street consensus is looking for Alcoa to report a loss of 3 cents a share for the quarter, compared with earnings of 28 cents a share in the first quarter of 2011.

Waiting for some good news

In general, I don't see much to tempt me to put money into cyclical stocks before earnings season and the macroeconomic news from Europe and China answer a few questions about growth.

In the United States, we get the March jobs numbers on Friday. Right now, economists are looking for the economy to have added 200,000 jobs in the month. While that would keep the economy's string of 200,000 or better months alive, it would also be a decline from the 227,000 added in February.

Near the end of the month, on April 27, investors will get the initial read on first-quarter growth of gross domestic product. The U.S. economy grew at a 3% annual rate in the fourth quarter, up from a 1.8% rate in the third quarter. The fear now is that high oil prices and the impending recession in Europe will cut into that growth rate.

We simply don't know.

Equally, I think we'll have a better understanding of the macroeconomic picture in Europe and China by the end of the second quarter, on June 30. Rising interest rates in Spain took the yield on the 10-year government bond to 5.4% at the close on March 30. That's still well below the 6.5%-plus level that signaled crisis at the beginning of the year, but it is significantly higher than the yield in early March of just below 5%.

The problem for Spain and the eurozone is that every investor who can do basic math knows that the expansion of the euro rescue fund agreed to on Friday isn't enough to meet current commitments and rescue Spain if the country needs a Greek-style restructuring or even an Ireland-style bank rescue. Spain's tough, tough budget for 2012 announced on Friday, with 27 billion euros ($35.9 billion) of additional spending cuts and tax increases, won't deliver the 5.3% of GDP budget deficit for 2012 that Spain has promised if the nation, along with the rest of the eurozone, sinks into recession.

How do we know that? Two "secret" reports by officials in the European Union, leaked to news organizations after being distributed to the finance ministers on Friday, say so. Despite 1 trillion euros ($1.3 trillion) in loans from the European Central Bank to European banks, "contagion may . . . re-emerge at very short notice," says one of the reports. The second report says very bluntly, "The euro crisis is not over."

Some very big money has started to react to that rather pessimistic scenario. Norway's sovereign wealth fund, which owns a whopping 2% of all European stocks, has recommended cutting its exposure to Europe to 40% in bonds (from 60%) and 40% in stocks (from 50%). The move has to be approved by the Norwegian government, probably in early summer, before the fund can lighten up its European positions in favor of increased investment in the United States and emerging markets. (Given increased cash flows into the sovereign wealth fund from higher oil prices, fund managers say they will be able to rebalance the fund without significant selling of existing assets.)

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