Scoring 1st Quarter Investments: Most Everything but Cash Not Doing Very Well

The bears had their way with just about everything in the first quarter of 1990: Except for a few pockets of strength in the stock market--such as high-tech firms--most financial investments have been lousy performers. Bonds, U.S. stocks, foreign stocks and precious metals all have fallen in value, on average.

After so much disappointment, many investors may be rethinking their strategies for the rest of the year. And while one quarter doesn’t necessarily make a trend, tallying your gains and losses quarterly at least helps keep you alert to opportunities--and potential trouble.

Here’s a look at the investment trends in the first quarter ending today, and the outlook:

U.S. STOCKS: The surprise for many investors may be how little ground their stocks lost in the quarter, given January’s plunge. Stocks rebounded strongly in March in the face of continued bearishness. Through Thursday, the Standard & Poor’s 500 index of major stocks was off just 2.7% on the year to date, on a total return basis. Total return measures the stocks’ change in price, plus dividend income. On price alone, the S&P; was down 3.6%. That’s like a $30 stock falling to $28.92.

Smaller stocks--the over-the-counter market--have fared worse, off 4.0% for the quarter. But investors who zeroed in on high-tech stocks profited: The Hambrecht & Quist growth-tech stock index, heavily weighted with technology companies, is up 3.9%, leading all investment categories in our tally.

Despite some tech disappointments, such as software firm Oracle Systems’ awful earnings released Tuesday, many experts say the tech stock rebound symbolizes a return to growth-stock investing in the 1990s. The market overall may look lousy, but stocks of companies promising strong earnings growth have been excellent gainers, notes Fred Applegate, president of Nicholas-Applegate Capital Management, a $2-billion San Diego-based money manager.

Nicholas-Applegate’s portfolio includes tech stocks such as Sun Microsystems and Autodesk, oil field service stocks such as Baker Hughes, and engineering stocks such as Irvine-based Fluor Corp. All of those stocks have been winners in the quarter, bucking the market decline.

“At the end of last year we had a lot of stocks that we liked quite a bit. We continue to feel the same way today,” Applegate said. Regardless of what happens to the broad market, he said, “We’re expecting our portfolio to show 20% to 25% earnings gains this year.” That should continue to draw other investors to the stocks, he said.

But if your stock-picking isn’t so hot, the market may be a dull prospect again in the second quarter, some analysts say. Chester Pado, a technical market analyst with Jefferies & Co. in Los Angeles, said he has spent a lot of time on the phone with money managers lately and that few show much interest in buying stocks. If the broad market is going to advance, it needs those big players to get excited again, Pado notes.

The big test in April will be first-quarter corporate earnings reports, expected to be disappointing in general. In theory, that’s already built into current stock prices, Pado said. If earnings are worse than expected, however, stocks could be in for another rough ride.

FOREIGN STOCKS: The average foreign stock mutual fund has lost about 6.7% in the quarter, largely because of the Japanese market’s plunge. But investors who targeted specific markets did pretty well. A U.S. investor in the West German stock market, for example, is up about 8% for the quarter, even with foreign currency losses. Hong Kong is up about 5%.

The best strategy for foreign investing remains the same, experts say: You should always have some money in foreign stocks, but spread it around. Mutual funds may be the smartest vehicle for most investors, despite the first quarter slump.

BONDS: A rise in interest rates early in the quarter surprised everyone, and the bond market got slammed. Long-term U.S. Treasury bonds have dropped 3.8% in value for the quarter. Corporate “junk” bonds suffered less--down 2.3%, according to Merrill Lynch & Co.’s junk total return index. Junk bonds’ high yields helped offset the sharp declines in bond prices.

This week, a new fear surfaced: that Japanese investors have begun dumping T-bonds. The Japanese government is rumored to have called on investors to avoid U.S. investments. The goal would be to halt the dollar’s rise versus the yen. If Japanese selling continues, bonds may be hit hard.

The other risk is that interest rates rise further. John Connolly, Dean Witter Reynolds’ chief market strategist, believes that “we have weathered the worst in both the bond and stock markets” and that rate fears are overblown. Even so, Robert Di Clemente, a Salomon Bros. economist, finds it hard to make a case for bonds in the second quarter. While rates may not rise, the chance of a sharp decline also is low, he said. That means little potential for big capital gains on existing bonds. “I don’t think we’d be looking for any big windfall in the bond market,” he said.

CASH: When all else fails, money market funds and bank CDs at least guarantee some kind of return. If you bought a 1-year bank CD yielding 8.3% annually earlier this year, you earned one-fourth of that yield in the first quarter--about 2.1%. It beats losing money. Just remember: Cash is a parking place. To earn healthy returns long term, you almost certainly have to be in stocks, bonds and other core investments.

Briefly: Did someone know that Oracle Systems would announce disastrous earnings Tuesday? The software stock plunged $7.875 to $17.50 Wednesday, but the more interesting story is that some smart investors sold last week. Oracle fell from $28.125 on March 19 to $24.625 early this week, then leveled out--until Wednesday.

FIRST-QUARTER INVESTMENT ROUNDUP How did your portfolio perform in the first quarter, which ends today? Probably not well, if you are near the average returns on most financial investments. It was a good quarter to be in small growth stocks and in cash investments but not much else. Here are estimated average total returns for key investments. Total return measures price change plus any dividend or interest income.

First quarter 1989 Investment return (est.) return H&Q; growth/tech stock index +3.9% +17.4% 1-year bank CD (L.A. average) +2.1% +8.4% Money market mutual fund +1.9% +8.9% Municipal bonds +0.1% +10.2% Intermediate-term Treasury bonds -0.2% +12.7% Junk bonds -2.3% +4.2% S&P; 500, with dividends -2.7% +31.6% Growth stock mutual funds -3.0% +25.4% Long-term Treasury bonds -3.8% +18.9% NASD OTC composite stock index -4.0% +20.3% Silver -5.0% -13.7% Foreign stock mutual funds -6.7% +22.3% Gold -7.9% -1.8%

Sources: Lipper Analytical Services (mutual fund returns); Hambrecht & Quist (growth/tech stock index); Shearson Lehman Hutton (T-bond indexes); Merrill Lynch (junk bond index); Bond Buyer (muni bond index); Bank Rate Monitor; IBC/Donoghue’s; N.Y. Commodity Exchange