YOUR MONEY: FIRST-QUARTER INVESTMENT REVIEW : FINANCIAL MARKETS : Upward Bound : 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 stocks still managed to post heady gains worldwide in the first quarter ended Friday.

U.S. blue-chip stocks advanced 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 on Friday at 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 appeared stirred but not badly shaken.

“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 first-quarter story was much the same overseas. 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 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 gains in some key commodity prices, especially in the grain and energy sectors.

Stocks’ ride during the quarter, however, may have 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 most of the bond market’s optimists: a report that the economy had created 705,000 new jobs in February, a number far exceeding all estimates.

The following Monday, the Dow rebounded 110 points as investors did what they usually do when the market plummets--buy on the dip.

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

Some Wall Street pros, while acknowledging that stocks at current heights are no better than fairly valued relative to expected 1996 earnings--and that earnings themselves are suspect in this aging economic expansion--say the stock market continues to be lifted by a massive tide of cash that shows few signs of slowing meaningfully.

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

Meanwhile, the number of initial public stock offerings in the quarter was 161, worth $7.7 billion total--or less than one-fifth the value of stocks that companies say they plan to retire through buybacks.

Although most analysts concede that the stock market is vulnerable to a sharp pullback--especially if bond yields continue to rise--many say it may still be too early to forecast the kind of 10% or greater “correction” that many investors would love to see.

“That’s the whole problem--everybody wants a correction, because everybody wants to buy,” says Leon Brand, strategist at NatWest Securities in New York.

Among Friday’s highlights:

Stocks were mixed on the quarter’s last day of trading. Shares of computer companies gained on expectations their earnings will rise the fastest this year, while oil shares retreated.

With opinion split on whether the economy is rebounding or stuck in neutral, investors sought out companies whose products are in heavy demand. With companies increasing the amount of business done electronically, computer and software sales are likely to remain strong, analysts said.

“Technology’s been the key to productivity gains, and the U.S. is a leader in technology,” said Robert Freedman, chief investment officer at John Hancock Funds, which manages $19.5 billion in assets. “I’m a believer in blue chips like Cisco Systems and Microsoft.”

The Dow index, which has only one computer stock, fell 43.71 points to 5587.14, losing 35 points in the last half-hour of trading. The retreat was sparked by computer-guided “sell” orders, according to Birinyi Associates Inc.

Leading the Dow industrials lower Friday were shares of oil companies, which have been among this week’s best performers. Exxon slid 2 1/8 to 81 5/8 after reaching a record high of 86 on Tuesday. Texaco dropped 1 1/8 to 85 3/4 and Chevron gave up 1 1/4 to 56 1/8.

“Those stocks had a tremendous run,” said Todd Clark, senior trader at Rodman & Renshaw Inc.

Boeing, also a Dow component, fell 1 3/4 to 86 5/8 a day after the company made presentations to investors. Byron Callan of Merrill Lynch & Co. said the aerospace company remains optimistic about its growth prospects, though it didn’t suggest anything that “would encourage an even more aggressive set of near-term positive expectations.”

The Nasdaq composite index rose 6.54 points to 1101.38. Among individual stocks, Microsoft rose 7/8 to 103 1/8, Intel gained 1/2 to 56 7/8, Cisco Systems rose 1/4 to 46 3/8 and 3Com jumped 1 1/8 to 39 7/8.

The Standard & Poor’s 500 index also suffered a late drop and ended down 3.44 points at 645.50. For the week, the index lost 5.12 points, or 0.08%. The index is up 4.8% for the quarter, the best quarterly performance since the third quarter of 1995, when it gained 7.3%.

Some 1,288 shares rose and 1,057 dropped on the New York Stock Exchange, where 413 million shares changed hands. The three-month daily average volume is 420 million shares.

Investors continued to punish companies that fall short of earnings expectations. Eastman Chemical was the latest victim. The Kingsport, Tenn.-based company said first-quarter earnings will probably come in below the average analyst estimate of $1.64 a share because of a narrowing profit margin. The stock fell 3 7/8 to 69 1/8.

Bloomberg Business News contributed to this report.

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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.