YOUR MONEY: FIRST-QUARTER INVESTMENT REVIEW : FINANCIAL MARKETS : Wall Street Parties On : Heavy Cash Influx Helps Stocks Overcome the Negatives

The bond market again tried to play the spoiler at Wall Street’s long-running party, but stock investors still managed to have a rowdy--and mostly profitable--time worldwide in the first quarter ended Friday.

Many analysts warn that the second quarter may be no less rowdy for stocks, but they predict that gains will be harder to come by--although investors have heard that line before.

The first quarter saw U.S. blue-chip stocks advance for a fifth straight quarter, with the Dow Jones industrial average jumping 9.2% after soaring 33.5% in 1995.

The Dow ended the quarter with a 43.71-point loss Friday to 5,587.14, but it still was up 470.02 points from its year-end close of 5,117.12.

Despite a sharp jump in bond yields during the quarter as bond traders focused on stronger-than-expected economic data--and as most gave up any hope that the Federal Reserve Board will cut short-term interest rates any time soon--the stock market overall refused to cave in.

“This has been a market where you could try to call the top every other week, but you end up being road kill,” says Dennis Jarrett, analyst at Jarrett Investment Research in New York.

The story was much the same overseas in the first quarter. Germany’s key stock index jumped 10.3% in local currency terms despite a rebound in bond yields across Europe. Interest rates also crept up in Japan, but that failed to keep the Nikkei-225 stock index from gaining 7.7% for the quarter, ending at a 21-month high on Friday, at 21,406.85.

U.S. stocks not only survived the rise in bond yields that carried the bellwether 30-year Treasury bond yield from 5.95% at year’s end to 6.67% by Friday, but the market also weathered surprising and potentially inflationary gains in some key commodity prices, especially in the grain and energy sectors.

Stocks’ ride during the quarter, however, probably caused some investors to get out the Dramamine. The Dow plummeted 171.24 points, or 3%, on Friday, March 8, when the government dropped the bombshell that killed off most of the bond market’s optimists: a report that the economy created 705,000 new jobs in February, a number far exceeding all estimates.

The following Monday, the Dow rebounded 110.55 points as investors did what they usually do when stocks abruptly plummet--buy on the dip.

The Dow has fluctuated widely since, reaching a record 5,683.60 on March 18 before slipping again. At Friday’s close, the index is 1.7% off its peak.

Many Wall Street pros acknowledge that, at current heights, stocks are no better than fairly valued relative to expected 1996 earnings. Indeed, billionaire Warren Buffett, perhaps the most admired investor of all time, admitted during the quarter that he wouldn’t buy shares in his own company (Berkshire Hathaway) at the recent high of $38,000 a share. That pronouncement has helped pull the price down to $33,850 currently.

Nonetheless, analysts say the stock market continues to be lifted by a massive tide of cash that shows few signs of slowing meaningfully.

Small investors pushed record sums into stock mutual funds in the first two months of the year. And corporations themselves are devouring stocks via a continuing takeover wave and via stock buybacks.

Securities Data Co. calculates that 327 companies announced stock buybacks worth $41 billion in the first quarter, a record. And the value of corporate mergers announced in the quarter was $208 billion, up from $187 billion in first-quarter 1995.

Meanwhile, the value of initial public stock offerings brought onto the market in the quarter was a mere $7.7 billion, from 161 companies. The dollar total was less than one-fifth the value of the stock expected to be retired through buyback programs announced in the quarter.

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With so much cash competing to buy stocks, the argument goes, the market can’t help but keep rising.

Yet it’s also worth noting that the market’s increased volatility in the first quarter suggested a growing lack of conviction on the part of many investors.

Technology stocks gyrated wildly as investors weighed fears of the current slowdown in personal computer sales against the long-term bullish trend. Classic growth stocks like drug giant Merck were darlings in February, only to fade in March. Industrial stocks that could benefit from stronger economic growth were all over the map.

What’s more, the blue-chip Dow index has basically lagged the broader market since the March 8 tumble. The Russell 2,000 index of smaller stocks, for example, was up just 4.7% for the quarter, about half the Dow’s net rise. But the Russell closed at a record high on Friday, and has gained 3.6% from its close on March 8, while the Dow is up 2.1% since then.

Eugene Peroni, market analyst at Janney Montgomery Scott in Philadelphia, says the rotation of money among market sectors, and from big stocks to smaller ones, is positive rather than negative for the bull market.

“It tells you that money is staying in the market,” rather than leaving, he said.

But bearish analysts like James Stack of the InvesTech newsletter in Whitefish, Mont., say the bulls are just kidding themselves. “Market tops are usually slow, rounding affairs that take time to develop. They’re most easily recognized by divergences as investors become more nervous and more selective,” he says.

In the short term, most Wall Streeters say the market’s direction will be determined by the next move in bond yields and the strength of first-quarter corporate earnings reports.

While the promise of continued economic growth--rather than recession--undoubtedly helped underpin stocks in the first quarter, that can’t go on forever if economic data become strong enough to push yields sharply higher.

The market also is vulnerable to disappointing earnings news, although some analysts note that there seemed to be fewer of the normal corporate “pre-announcements” of lousy first-quarter earnings in recent weeks.

Some bulls warn that the greater danger is in underestimating the market, even after its remarkable past 15 months.

Leon Brand, strategist at NatWest Securities in New York, notes that most investors would be thrilled by even a 10% pullback in stocks. “But that’s the whole problem--everbody wants a correction,” he says. “Everybody wants to buy.”

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Can the Bulls Keep Control?

Wall Street followed last year’s huge stock market gains with another big rally in the first quarter, and the bullishness spread worldwide. But higher interest rates now are threatening stocks’ advance.

The Dow Soars--and Hangs

The Dow Jones industrial average led most other stock indexes higher in the first quarter, but after rocketing in January, it has mostly struggled since--as bond yields have risen. Weekly closes since October:

Friday: 5,587.14, down 43.71

Widespread Rally

Stocks’ first-quarter gains were across-the-board in the U.S. and in most foreign markets as well. Percentage gains for the quarter:

U.S. stock indexes:

Dow industrials: 9.2%

Dow transports: 8.6

NYSE composite: 5.3

S&P; 500: 4.8

Russell 2,000: 4.7

Nasdaq composite: 4.7

Foreign stock indexes:

Mexico (Bolsa): 10.6

Germany (DAX): 10.3

Hong Kong: 8.8

Japan (Nikkei): 7.7

Britain (FTSE): 0.3

Nervous Bonds

While stock prices responded to continued economic growth here and abroad, bond yields rose worldwide as investors began to fear higher inflation--and the end of Federal Reserve Board interest rate cuts. Two- and 30-year Treasury securities yields, weekly closes:

(see newspaper for chart)

30-year T-bond: 6.67%

Two-year T-note: 5.77%

Source: TradeLine

Note: Foreign index gains are in local currencies.