Market Ends Big Quarter on Low Note; Dow Dips : Wall Street: The industrial index leaped 280.20 points, or 10.6%, in the quarter, which saw investors pour money into small companies in anticipation of a recovery.
The stock market posted dramatic gains in the first quarter, anticipating in classic style the end of an economic recession.
The question now: Has the recession ended--or has the market somehow been hoodwinked?
On Thursday, the Dow Jones industrial average slipped 3.71 to 2,913.86 in a quiet session before today’s Good Friday holiday. For the quarter, the Dow leaped 280.20 points, or 10.6%, its best quarterly performance in four years.
But almost all of the Dow’s rise was achieved between Jan. 17--the start of the Persian Gulf War--and Feb. 11. Since then, the Dow has churned mostly between 2,875 and 2,975 as investors have begun to reconsider talk of a new bull market.
The blue chip Dow made a run at 3,000 early in March but failed to close over that historic mark, just as it had failed to do so last July. The closing high in the quarter was 2,973.27 on March 6. The record remains 2,999.75, set last July 16.
Despite that disappointment, the Dow was just a sideshow to a much bigger market story in the first quarter: Investors, expecting an end to the first official economic recession since 1982, poured money into many badly depressed smaller stocks and into more speculative issues in general.
That enthusiasm was fueled by falling interest rates and by the fast allied victory over Iraq in the Gulf War. Many investors believe that lower rates and the war’s end will spark a surge in consumer spending and business investment, reversing the economic slide that began with Iraq’s August invasion of Kuwait.
And if the economy does come back, it’s expected to quickly boost the fortunes of many companies that were given up for dead--especially smaller firms whose shares were crushed in 1990’s bear market.
Investors’ strong optimism shows in a tally of the quarter’s milestones:
* The NASDAQ composite index of about 4,000 mostly smaller stocks rocketed 29%, nearly three times the Dow’s rise and the biggest quarterly gain ever for the index. The previous NASDAQ record was a 26.5% rise in the third quarter of 1975.
The NASDAQ index closed Thursday at 482.30, nearing its all-time high of 485.73 set on Oct. 9, 1989.
* NASDAQ trading volume surged to about 9.8 billion shares, also an all-time high, based on preliminary estimates. The old record was 9.6 billion shares in the third quarter of 1987.
* The hottest stock groups included those with companies slammed the worst in the fall, when consumer confidence was at its lowest. Shares of apparel retailers jumped 45.8% on average; S&L; stocks were up 34.7% on average.
* High-yield corporate junk bonds, among the most speculative of investments, posted an average total return of 18.5% for the quarter, according to a First Boston Corp. index. Total return is price appreciation plus interest earned on the bonds. First Boston says the 18.5% is a record.
Can the stock and bond markets sustain that kind of exuberance? In recent weeks, Wall Street’s nerves have been jangled by worries that the economy isn’t recovering as fast as expected--and likewise, corporate profits. The market took a bad hit on March 19, when IBM disclosed that its first-quarter profit would be half of what analysts had expected.
With the economy’s strength still unclear while many stocks are at or near all-time highs, investors are caught between the fear of buying and the fear of selling. “I don’t want to be short (small) stocks,” says Len Hefter, head of over-the-counter trading for Jefferies & Co. in Dallas. “But I also would feel like a real idiot to be the last guy to own them.”
After stocks’ huge first-quarter gains, many analysts expect the market to run in place for a while, awaiting more clues on the economy and corporate profits. But few money managers believe that there’s much chance of a sharp plunge in stock prices soon.
John Ballen, who runs the $105-million Lifetime Emerging Growth small-stock mutual fund in Boston, admits that “it’s tempting to take profits now,” considering the paper gains investors have accumulated.
But he also notes that “we haven’t even started the economic recovery yet.” To sell would be premature, he says, because small stocks historically have continued to rise for at least several quarters after the economy has bottomed in recessions.
Moreover, the market appears to have two solid underpinnings now, experts say:
* The Federal Reserve, which has pushed short-term interest rates down to 6% from 7.5% last fall, continues to pump dollars into the financial system to support the economy. But Darrell Winrich, money manager at Winrich Capital Management in El Toro, notes that many of those dollars aren’t flowing into bank loans, but instead are finding their way into stocks and bonds, as loan demand remains sluggish.
While the Fed may not cut interest rates further, it is also unlikely to raise rates, most economists believe. That should provide a floor for stocks.
* The sharp rebound in investor and consumer confidence this year has snuffed out fears of an economic collapse--which was seriously being discussed by many on Wall Street last fall.
Typical of many big investors now is Dan Leonard, who runs the Financial Programs Technology stock fund in Denver. He expects stocks to pull back in the second quarter, as more investors take profits. But he adds: “I’d be very willing to buy on a good correction here. We still see earnings momentum in our stocks . . . and looking out into the decade, I think American technology is going to look pretty darn good.”
In Thursday’s market action:
* On the New York Stock Exchange, advancing issues outnumbered declines by about 5 to 4. Volume came to 150.75 million shares, the slowest in two months, against 201.83 million in the previous session.
* Overseas, British shares lost ground. The Financial Times-Stock Exchange 100-share index closed 8.1 points lower at 2,456.5. In Germany, auto stocks led a strong end-of-quarter rally. The DAX index jumped 14 points to 1,522.80, the highest since March 19.
In Tokyo, the Nikkei index gained 102.27 to 26,206.92.
Credit
Bond prices crept higher in light pre-holiday trading that largely ignored the latest economic reports.
The Treasury’s bellwether 30-year bond was up 1/8 point, or $1.25 per $1,000 in face amount. Its yield was 8.24%, down from 8.25% late Wednesday.
Traders were cautious because Thursday marked the conclusion of the first quarter for most U.S. companies and today is the end of the Japanese fiscal year. Portfolio managers generally limit trading during these times to finalize their quarterly investment activities and report to shareholders.
The federal funds rate, the interest on overnight loans between banks, was quoted at 6.063%, up from 6% late Wednesday.
Currency
The dollar’s rally turned mixed, as the currency raced to a seven-month high against the Japanese yen but retreated from the German mark for the first time in a week.
The dollar, which hit a 12-month high against the mark Wednesday, slipped after news that a protest in Moscow did not result in violence.
In New York, the dollar ended at 1.7038 marks, down from a close of 1.7070 marks Wednesday, when it hit a 12-month high of 1.7170.
The dollar peaked in New York at 141.50 yen before settling at 141.23 yen, up sharply from late Wednesday’s 139.56 yen. It was the highest intraday level since the dollar hit 142.45 yen Sept. 6 in reaction to tension in the Persian Gulf.
Commodities
Prices of grain and soybean futures edged higher in advance of an important government crop report.
The report, released after the close of trading, indicates that farmers’ planting intentions for corn and soybeans are below the Agriculture Department’s estimates made on Feb. 11 and below the market’s expectations.
Precious metals futures moved a little higher as traders kept an eye on the pro-reform demonstrations in Moscow.
On the Commodity Exchange in New York, gold settled 80 cents to $1 higher, with the contract for delivery in April at $357.10 an ounce.
Energy futures were mostly higher on the New York Mercantile Exchange with light, sweet crude oil settling 22 to 39 cents higher, with the May contract at $19.63 a barrel.
HOW KEY INDEXES FARED
Small stocks led the market throughout the first quarter, and the NASDAQ composite index of small issues ended with its biggest quarterly percentage gain ever.
Stock Thursday Percentage gain index close for quarter NASDAQ composite 482.30 +29.0% Amex mkt. value 359.20 +16.6% Wilshire 5,000 3,583.67 +15.6% NYSE composite 205.30 +13.7% S&P; 500 375.21 +13.6% Dow industrials 2,913.86 +10.6%
FIRST QUARTER’S BEST AND WORST STOCKS
Here are the top 10 and bottom 10 stock industry groups for tn S&P; 500 index gained 13.6%.
10 Best Group: Pct. change Electronic instruments: +54.5% Apparel retailers: +45.8% Toy makers: +41.8% Leisure time: +41.5% Shoemakers: +40.8% Apparel makers: +39.4% Office equipment: +35.7% Savings and loans: +34.7% Financial cos. (misc.): +34.5% Home builders: +34.2%
10 Worst Group: Pct. change Gold mining: -16.0% Oil/gas drilling: -8.3% Natural gas: -3.0% Household products: -2.8% Coal: -2.7% Telephone utilities: -1.7% Oil cos. (domestic): +3.6% Oil well services: +4.2% Electric utilities: +4.7% Steel: +4.8%
Data through Wednesday
Source: Smith Barney, Harris Upham & Co., using S&P; indexes
