‘Old,’ ‘New’ Stock Sectors Battle for Dominance

Whose economy--and market--is it, after all?

That remains the biggest question on Wall Street as the first quarter ends.

The technology stocks of the “new economy” rebounded Friday after a four-day drubbing, and their spectacular market-leading performance for most of the first quarter still left their investors with substantial gains as the quarter closed.

The Nasdaq composite index jumped 114.94 points, or 2.6%, to 4,572.83 on Friday, bringing the year-to-date rise to 12.4%. But that’s half what the gain had been as of March 10.

Meanwhile, many “old-economy” stocks have come roaring back after a blistering decline in the early part of the year, when technology ruled.

The blue-chip Standard & Poor’s 500-stock index added 0.7% on Friday, and now is up 12% from its low reached Feb. 25. For the quarter, the S&P; managed a 2% rise in price.

The Dow Jones industrial average, which eased 58.33 points to 10,921.92 on Friday, likewise has rebounded in recent weeks, but still recorded a 5% loss for the quarter.

The great divergence in the U.S. equity market was just one of many in markets worldwide in the first quarter.

In the U.S. bond market, Treasury yields have tumbled in recent weeks, thanks in part to expectations that the supply of bonds would continue to shrink as Uncle Sam buys back debt, and to “safe haven” buying by some suddenly nervous stock investors. The 30-year T-bond yield ended Friday at 5.84%, its lowest since last May.

But in the corporate junk bond market, yields have reached their highest levels since the mid-1990s, as investors fret about the risks to the health of the economy--and the health of heavily indebted companies--as the Federal Reserve continues to tighten credit. (The Fed next meets May 16.)

In commodity markets, oil gave everybody a scare. Even with OPEC’s promised production hikes, the price ended up 5% for the quarter at $26.90 a barrel on Friday.

Yet gold and silver prices have slumped lately to their lowest levels since last summer.

Overseas, major stock markets generally posted gains of between 5% and 10% for the quarter in native currency terms. But the dollar’s strength depressed those results for U.S. investors.

For most investors, the most exciting--or unnerving--story remains the new- versus old-economy battle in the equity market.

Many Wall Street pros continue to warn that new-economy stocks in general still are excessively priced relative to their growth outlooks.

At the same time, sentiment toward beaten-down old-economy stocks may continue to warm, especially if many of those companies post decent earnings growth for the first quarter, experts say.

And indeed, corporate earnings overall are expected to be up sharply in the quarter. Earnings tracker First Call in Boston expects operating earnings for the S&P; 500 companies to be up 22% in the first quarter versus a year ago, an even bigger gain than the 21.4% actual rise recorded in the fourth quarter. Thank the strong economy for that profit performance, analysts say.

And even as profit takers have dumped tech stocks in recent weeks, market bulls have reminded sellers that tech companies ought to be among the biggest beneficiaries of strong economic growth, in terms of what flows to their bottom lines.

“U.S. tech stocks, though not cheap, still look quite reasonably priced compared with tech stocks worldwide,” argues Edward Keon Jr., market strategist at Prudential Securities in New York.

Whether the majority of investors see it that way--or whether old-economy stocks are the new market “momentum” play--will be the first order of business to be decided in the second quarter.

Day’s Winners, Losers, C4-C5

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The ‘Old Economy’ Strikes Back

The stock market closed out the first quarter Friday with a broad rally, but gains in technology stocks recouped only a small part of their losses earlier in the week. The hot performance of tech shares and other “new-economy” names in the first two months of the quarter has given way to heavy profit taking--while “old-economy” names, badly beaten down in the first two months, have recently resurged.

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Blue Chips Rebound . . .

Weekly closes for the Standard & Poor’s index of 500 blue-chip stocks:

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Friday: 1,498.58

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... and Nasdaq Cools Off

Weekly closes for the Nasdaq composite index:

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Friday: 4,572.83

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* Interactive Week index

Source: Bloomberg News