Market Ambiguity as 1st Quarter Ends
Bulls and bears both call the first quarter that ended Wednesday a transition period for Wall Street.
They just disagree over whether it’s a transition to a stronger market, or a weaker one.
The powerful tide that lifted nearly 90% of all stocks last year ebbed in the first quarter, leaving the Dow Jones industrial average down 0.9% in the period and the Nasdaq composite index off 0.5%.
Yet an eclectic mix of market sectors scored strong gains over the last three months, despite nagging concerns about the economy’s health, renewed terrorism fears and soaring commodity prices that raised the specter of higher inflation.
A Standard & Poor’s index of small-company stocks, for example, jumped 6% in the quarter after surging 37.5% last year. A Dow index of utility stocks rose 5.3% after a 24% advance last year.
Wednesday saw more of the kind of market crosscurrents that defined the quarter. The Dow industrials slipped 24 points to 10,357.70 and Nasdaq eased 6.41 points to 1,994.22, but more stocks rose than fell on the New York Stock Exchange and on Nasdaq.
In commodities trading, gold and silver prices leaped to 15-year highs as some investors sought safety in the wake of the latest violence in Iraq and as the dollar weakened anew. Near-term gold futures added $5.60 to $427.30 an ounce; silver jumped 17 cents to $7.94 an ounce.
A rumor, quickly denied, that Federal Reserve Chairman Alan Greenspan had suffered a heart attack also helped to egg on the gold and silver rallies.
Many Wall Street analysts had predicted late last year that the stock market would become more challenging in 2004. Optimists say the market is in transition: It’s still a bull market, just a pickier one. But they contend that there’s no compelling reason to give up on stocks overall.
“The basic fundamentals driving the market seem to me to be on track,” said Robert Morris, chief investment officer at Lord Abbett & Co. in Jersey City, N.J. In particular, “I think corporate earnings are going to look good this year and I think they’re going to look good next year.”
Indeed, operating earnings of the Standard & Poor’s 500 companies are expected to rise 16.6% in the first quarter from with a year earlier, according to earnings tracker Thomson First Call.
Market bulls also are betting that the economy soon will begin showing significant growth in new jobs, which could wipe away first-quarter worries that the recovery is fading. The government on Friday will report on March employment trends.
Analysts who are more cautious on the market say the pullback in many stock sectors in the first quarter reflected investor concerns that corporate earnings growth, while still strong, may have peaked.
That’s the outlook of Richard Bernstein, chief global strategist at Merrill Lynch & Co. in New York. “I think we are in a transition in the market, and I think what’s behind it is slower profit growth,” he said.
Investors who adhere to that view generally believe that if you’re going to buy stocks now, you should avoid riskier shares -- such as many smaller technology issues -- and instead stick with higher-quality, lower-risk names in industries where earnings growth may be easier to sustain even if the economy slows.
Those so-called defensive stock sectors, such as electric utilities, household products and healthcare, began to rally sharply early in February, just as the technology sector was falling out of favor and the market as a whole was entering its deepest pullback in more than a year.
After peaking at a 32-month high of 2,153.83 on Jan. 26, the tech-dominated Nasdaq composite index slumped to 1,901.80 by March 23, a drop of 11.7%.
The Dow industrials topped out at 10,737.70 on Feb. 11, then dropped to 10,048.23 by March 24, a decline of 6.4%.
The market’s losses were worsened by the terrorist attacks in Madrid on March 11, which hit travel-related stocks such as airlines especially hard.
Some investors who pulled away from stocks in February and March bought Treasury bonds instead, driving yields lower. The yield on the 10-year Treasury note ended the quarter at 3.84%, down from 4.25% at the start of the year.
Lower rates, in turn, helped to support some stock sectors such as real estate-related issues.
But over the last week, Wall Street’s fear level appears to have subsided significantly. The Nasdaq index has gained 4.9% from its March low, trimming the decline from the January high to 7.4%. The Dow’s rebound over the last week has left it down just 3.5% from its first-quarter high.
Optimists say the turnaround in stocks shows that the first-quarter pullback was a normal “correction” in an ongoing bull market. Typically, such corrections temporarily lop 5% to 15% off key indexes before they resume their climb.
Bearish investors “tried to take [stocks] down, but they didn’t do a very successful job,” said Michael Holland, head of money management firm Holland & Co. in New York.
He expects the market to remain in an uptrend, underpinned by an improving economy. “Companies are saying the outlook is getting better and better,” Holland said.
But with investor expectations high, companies that disappoint risk severe markdowns: QLogic, an Aliso Viejo-based maker of computer chips, plummeted $9.69, or 23%, to $33 on Wednesday after warning that first-quarter sales fell short.
For the market overall, some big questions still loom: Have oil prices peaked or are they headed higher? How would investors react to another terrorist attack on U.S. soil? And perhaps most important, will the economy begin to show substantial job growth -- and if it does, will that hasten the day that the Federal Reserve begins to raise interest rates?
For now, many Wall Street bulls say the first-quarter gains racked up by such disparate stock sectors as biotechnology, real estate investment trusts and energy suggest that most investors are inclined to stay in the market, even if they are becoming choosier about the kinds of stocks they buy.
