Quarter Does an About-Face
Nirvana didn’t last very long.
An economy and financial market outlook widely described as perfect just a month ago has suddenly become fraught with worry, ruining what was shaping up as another great quarter for stocks’ bull market.
Instead, many investors are worried that they see the shadow of the bear, as the stronger-than-expected economy pushes interest rates higher and fans inflation worries.
The first quarter ended Monday with a dive of 157.11 points, or 2.3%, in the Dow Jones industrial average, leaving the blue-chip index up just 2.1% for the quarter.
Thus, the Dow surrendered most of what had been a 9.9% year-to-date gain at its record high of 7,085.16 set on March 11.
In the broad market, the blue-chip Standard & Poor’s 500 index gained 2.2% for the quarter, likewise giving back in the final weeks most of what it had racked up in January and February.
Smaller stock indexes fared much worse. The Nasdaq composite index, heavy with technology stocks, lost 5.4% for the quarter.
Moreover, the indexes’ gains or losses for the three months don’t say much about the pain of the last few weeks, as stocks have tumbled--first in the wake of Federal Reserve Board Chairman Alan Greenspan’s warnings about potential “irrational exuberance” in markets, then in the wake of the Fed’s decision a week ago to tighten credit for the first time in more than two years.
Now, “People are worried about additional rate increases that may throw the economy off course” eventually, said Mary Sunderland, who manages $1.5 billion as head of equity investing at Skandia Investment Management Inc.
Many veteran investors concede, however, that the stock market was just begging for something to go wrong, after soaring for the past two years, and trying to add more to those gains in the first quarter.
“The market was ripe for this pullback,” said Warren Isabelle, senior vice president at Evergreen Keystone Funds, which oversees $30 billion.
“This is not the big one,” said Richard Huson, a money manager and co-founder of Crabbe Huson Group, which oversees $4 billion. “For this market to break down, you’d have to see a huge shift in psychology in a rapid period of time. I don’t think that’s likely. It may be after a series of declines, where people discover over a period of time they’re not making money.”
For now, interest rates are a major worry.
Monday’s slide in the overall market came as the yield on the benchmark 30-year Treasury bond hovered at 7.09%, its highest since Sept. 11.
Yet some pros believe the longer-term story in the bond market will be lower, not higher rates.
Barton Biggs, Morgan Stanley’s chief investment strategist, told clients that the benchmark 30-year T-bond yield could fall to 6% by year-end and 5.5% by the summary of 1998. “Inflation is not a problem,” Biggs said.
Indeed, Biggs advised clients to boost their holdings of U.S. Treasury bonds, saying U.S. “high-grade bonds” are the best investment of any asset class worldwide.
In the near term, the U.S. stock market’s ride may hinge on what happens with first-quarter corporate earnings reports, and whether investors pay more attention to earnings or to interest rates.
“I don’t think you can see any kind of positive or sustaining rally in stocks with bonds trading over 7%,” said Gene Grandone, director of investment counseling at Northern Investment Counselors, which manages $7 billion. “Bonds offer pretty good competition for stocks.”
But Ray Goodner, who manages about $1 billion of bonds at American Express Financial Advisors in Minneapolis, said, “I don’t think it’s a great story for bonds anywhere,” with the world economy potentially picking up speed this year.
“The phenomenon for the rest of the world is rates are now rising,” said Scott Turner, who manages about $2 billion of international bonds at Prudential Global Advisors in Newark, New Jersey. “I see all markets as being relatively poor.”
Among Monday’s highlights:
* Among the day’s biggest decliners was Columbia/HCA Healthcare Corp., which dropped 3 7/8 to 33 5/8. The largest U.S. hospital company has been under scrutiny for its Medicare billing and its practice of giving doctors ownership stakes in hospitals.
Shiva Corp. plunged 3 1/16 to 8 13/16 after the computer networking equipment maker said it will report an unexpected first-quarter loss because of fierce competition from rivals like U.S. Robotics Corp. The company also said Chief Financial Officer Cynthia Deysher resigned for personal reasons.
Ascend Communications Inc., another computer networking company, dived 11 1/4 to 40 3/4 on concern that its planned purchase of Cascade Communications Inc. will hurt earnings. Cascade lost 2 to 26 3/8.
The stock market had its share of advancing issues, and two of the biggest ones rose on mergers and acquisitions.
Belden & Blake Corp. rallied 5 1/8 to 25 7/8 after Texas Pacific Group, an investment partnership, said it will buy the oil and natural gas company for about $304 million.
Dynamics Corp. of America climbed 5 to 38 1/8 after WHX Corp. made an unsolicited offer to acquire the maker of electronic components and commercial appliances for $160 million, or $40 a share. WHX fell 1/4 to 6 3/4.
Shares of chemical, auto and heavy-equipment makers--so-called cyclical companies because their profits rise and fall economic cycles--helped stocks pare losses. Though the economy may slow eventually, its rapid growth now means those companies profits should boom during the next six months.
Among the gainers, Ford Motor Co. climbed 1/2 to 31 3/8, tractor maker Deere & Co. rose 1/4 to 43 1/2 and metals company Phelps Dodge Corp. rose 1/2 to 73 1/8.
“Most cyclical companies will benefit at least initially from a pickup in inflation and a stronger economy,” said Huson, who has recently purchased shares of Mead Corp., Ford and Freeport-McMoRan Copper & Gold Inc. “Down the road, the companies would be hurt with significantly higher rates. But there may be a long way between now and then.”
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