A WILD QUARTER ON WALL STREET : Bulls See Values in Selloff, But Many Fear New Slide

The most encouraging thing Wall Streeters can say about the first quarter is that it doesn’t get much worse than this.

They hope.

The quarter ended Thursday with a whimper in most markets, after one of the wildest weeks in at least three years. World stock markets, most of which had hit record highs late last year or early this year, generally closed the quarter with deep losses--victims of rising interest rates and political turmoil since mid-January.

The surge in rates, meanwhile, also has slammed bond markets around the globe, devaluing older bonds and in the process effectively wiping out investors’ quarterly interest earnings, and then some.

For those investors who sought refuge in hard assets like commodities, the results were mixed. Gold barely inched higher for the quarter, from $390.80 an ounce on Jan. 1 to $391.80 on Thursday. Some more-exotic commodities, such as platinum, managed bigger gains.

The safest place to be, all things considered, was in a money market fund: You earned 0.7% for the quarter in the average fund. The money funds’ paltry 2.8% annualized yields may have begun to look like great returns, at least for investors who believe that the steep declines in stocks and bonds this year mark the start of a global bear market in financial assets.

But is the bear talk overdone? Here’s a look at key investment sectors, how they fared in the first quarter, and the outlook:

* U.S. stocks: The Standard & Poor’s 500 index sank 4.4% in the quarter, its biggest quarterly price decline since the bear market plunge of 14.5% in third-quarter 1990.

And from its Feb. 2 record high of 482.00, the S&P; has now lost 7.5%.

By now, most investors know where to put the blame for the market’s selloff: the Federal Reserve’s first short-term interest rate hikes in five years, President Clinton’s Whitewater woes and rising political tensions overseas.

But is any or all of that enough to cause a true bear market, meaning a plunge of 20% or more? Not yet, says Salomon Bros. strategist David Shulman. He has been cautious about stocks since last fall, but on Thursday he told clients to boost stocks to 50% of their portfolios, from 45%, leave bonds at 30% and cut cash to 20% from 25%.

“I think the worst of this (selloff) is over,” Shulman said. He views the market’s slide as merely a classic “correction,” and sees a good chance that the market will retest its all-time highs in the next six months.

Steven Einhorn, strategist at Goldman, Sachs & Co. in New York, also contends that the bear talk is premature. “We think stocks will be up 10% from here by year’s end,” he said. The average S&P; 500 stock now sells for 14 times estimated 1994 operating earnings per share, Einhorn noted, hardly a high price to pay in a growing economy.

But Shulman and Einhorn both concede that there’s no way to gauge how much damage has been done to investor psychology, and thus how much pent-up selling has yet to be released.

Their point is that, from a fundamentalist’s view, many stocks aren’t grossly overvalued, and some may even look relatively cheap--if you believe that the economy is strong enough to weather what has been a fairly normal increase in short-term interest rates for this stage of a recovery.

* Foreign stocks: If you like to buy markets when they’re down, this is where you should be shopping, many Wall Streeters say. But only if you have a truly long-term time horizon--because it isn’t clear that the sellers are finished.

Smaller Asian and Latin American markets have been crushed worst of all this year, largely because they gained the most in last year’s stock buying frenzy. Worries that China’s economic locomotive might overheat also have weighed on Asian stocks.

Losses in European markets have been smaller, but could accelerate if U.S. stocks continue to dive, analysts say. Still, with Europe’s economic recovery in the wings, many professional investors say stocks there hold substantial promise.

The key to the bullish case for foreign stocks is the same as for U.S. stocks: You have to believe that the world economy’s recovery survives the recent rise in interest rates. If it doesn’t, losses in thinly traded foreign markets will probably be far worse than U.S. stocks’ losses in the months ahead.

* Bonds: The decline of bond values worldwide has been this year’s biggest shocker. In the United States, everybody expected the Fed to raise short-term interest rates--but few expected long-term bond yields to surge as well.

In Europe, the rise in long-term bond yields actually began before the Fed tightened credit here on Feb. 4. The European yield-rise has been particularly puzzling, because nearly everyone agrees that Europe’s weak economic fundamentals suggest lower, not higher, interest rates.

Similarly, the surge in yields (and plunge in prices) of bonds issued by Latin American countries and other so-called emerging-market countries this year has gone far beyond what the fundamentals can justify, many pros say.

Much of this overreaction can be blamed on the simple fact that speculation in bonds had reached unprecedented levels last fall. The shakeout of those speculators (such as “hedge funds”) is still ongoing, but many bond pros say long-term interest rates around the globe have become quite attractive once again--if nothing else, presenting a trading opportunity in bonds until later in ’94.

Dan Fuss, at the Loomis Sayles Bond fund in Boston, said he has begun buying long-term Argentine bonds, which now yield about 11%, versus 7.1% for long-term U.S. Treasury bonds. Argentine and other emerging-market bonds “have just gotten creamed,” Fuss said.

Art Steinmetz, manager of the Oppenheimer Strategic Income bond fund in New York, said he’s shopping among beaten-up European bonds and U.S. mortgage bonds. But he also concedes that the bond market, like the stock market, may yet have to flush out more sellers. So his $4-billion-plus fund has 12% of its assets in cash, awaiting better opportunities--and calmer markets.

The Dow’s Round Trip

The U.S. stock market in the first quarter saw its steepest price decline since the bear market of 1990. The Dow industrials, after surging to a record 3,978.36 on Jan. 31, have plummeted in recent weeks on interest rate and political worries. At Thursday’s close of 3,635.96, the Dow was off 3.1% for the quarter--and back to last fall’s levels. The Dow industrials from September, 1993, to Thursday: March Madness: Dow Jones Industrial Average, Thursday: 3,635.96 up 9.21

A Dangerous Time, Worldwide

Stocks lose ground in most markets around the globe ...

First quarter price changes in key market indexes, in local currencies: Japan (Nikkei): +9.7% U.S. (Russell 2000): -2.9% U.S. (S&P; 500): -4.4% Mexico (Bolsa): -5.6% Germany (DAX): -5.9% Britain (FTSE-100): -9.7% Hong Kong (Hang Seng): -24.0% Thailand (SET): -26.3%

First-quarter total returns on bond indexes, in dollars: U.S. junk bonds: -0.9% U.S. GNMA bonds: -4.3% U.S. long-term Treasury: -5.9% Emerging markets bonds: -18.6%

First-quarter price changes for key commodities: Platinum: +7.2% Oil: +4.4% Copper: +4.3% Gold: +0.3% Wheat: -12.8% Lumber: -16.0% Source: Merrill Lynch & Co.; J.P. Morgan & Co.

Stock Winners, Losers

Here are the 10 best- and 10 worst-performing stock industry groups in the first quarter. Data is through Wednesday.

* The Best Group: 1st qtr.change Hospital mgmt.: +21.0% Engineering: +19.0% Truckers: +13.1% Clothing, retail: +12.0% Shoes: +11.2% Semiconductrs: +10.1% Chemicals: +6.0% Grocery chains: +5.8% Leisure: +5.6% Cosmetics: +5.6%

* The Worst Group: 1st qtr. change Comm. equip.: -25.7% Home builders: -20.7% Photography: -19.7% Airlines: -16.5% Drugs: -16.0% Misc. health: -16.0% Build. material: -15.5% Housewares: -14.7% Oil/gas drilling: -13.7% Elec. utilities: -13.4%

Source: Smith Barney Shearson, using S&P; indexes