Stocks See Global Gains in Quarter

By Tom Petruno

April 1, 2006 12 AM PT

Times Staff Writer

Staying the course with stocks mostly turned out to be a good strategy in the first quarter.

The blue-chip Standard & Poor’s 500 index scored its biggest quarterly gain since the fourth period of 2004, and smaller U.S. stocks roared to record highs. Most foreign markets also advanced, with many overseas indexes outshining Wall Street once again.

The global stock rally came despite rising interest rates, another jump in oil prices and hot competition from commodities such as gold and silver, both of which soared to their highest levels since the early 1980s.

In the face of those challenges, many equity investors seemed to keep their focus on one simple idea, says Sam Stovall, chief investment strategist at Standard & Poor’s: “The economy is still growing and earnings are still advancing.”

On Friday, the S&P; 500 slipped 5.42 points, or 0.4%, to 1,294.83, but it was up 3.7% for the three months, its best quarterly performance since an 8.7% jump in the final period of 2004.

The Dow Jones industrial average, down 41.38 points, or 0.4%, to 11,109.32 on Friday, also was up 3.7% for the quarter.

Both blue-chip indexes hit five-year highs in the last three weeks, as did the technology-dominated Nasdaq composite index, which eased 1.03 points to 2,339.79 on Friday but gained 6.1% for the three months.

The average U.S. stock mutual fund was up about 6.2% in the quarter, boosted by another strong performance by small-company shares, according to Morningstar Inc.

In part, stocks were helped by investors’ deepening distaste for low-yielding government bonds. The yield on the 10-year Treasury note ended the quarter at 4.85%, up from 4.39% at year-end and the highest since May 2004.

Over the last few months, bond investors increasingly have grown to fear that the economy’s resilience would mean no end soon to the Federal Reserve’s credit-tightening program.

The Fed this week lifted its key short-term rate to 4.75% from 4.5%, the 15th consecutive increase since mid-2004.

“Economic growth has rebounded strongly in the current quarter,” policymakers said, although they also said they expected growth to “moderate to a more sustainable pace.”

For big investors who typically must weigh the relative appeal of stocks versus bonds, equities clearly make more sense as the economy grows, says Jeffrey Kleintop, chief investment strategist at PNC Advisors, a Philadelphia-based money manager that oversees $50 billion.

“There’s no real competition from bonds,” he said.

His year-end target for the S&P; 500 index is 1,375, which would be a 6.2% increase from Friday’s closing level.

But his optimism is based partly on the expectation that the Fed will, in fact, stop raising interest rates sooner rather than later, Kleintop said.

Many economists believe that Fed policymakers will boost their rate to 5% at their May 10 meeting, and then pause.

Jan Hatzius, an economist at Goldman Sachs & Co., predicted that if the Fed raised its rate beyond 5%, Wall Street would begin to worry that the central bank was going too far, risking recession.

Surging oil prices may be a more immediate threat to stocks’ bull market, some analysts warn. Oil hit a two-month high of $67.15 a barrel on Thursday, then pulled back Friday to $66.63. The price was $61.04 at the end of 2005.

The oil market remains vexed by potential supply threats, including the U.S.-Iran showdown over Iran’s nuclear research program.

Nervousness over geopolitical risks helped drive gold and silver prices in the quarter to their highest levels since the early 1980s. Gold ended Friday at $581.80 an ounce in New York futures trading, up 12.5% from year-end. Silver ended at $11.48 an ounce, up 30% year to date.

But sheer momentum trading -- a piling-on by speculators in already-hot markets -- also could explain the dramatic gains in commodities, smaller stocks and foreign stocks in the quarter.

“Speculative investors are doing well here,” said Richard Bernstein, U.S. investment strategist at Merrill Lynch & Co.

The Russell 2,000 small-stock index, which far outpaced the S&P; 500 from 2003-2005, tacked on a 13.6% rise in the quarter and ended Friday at an all-time high.

Among foreign markets, Mexico’s main index jumped 8.3% in the quarter after surging 38% last year. Russia’s RTS share index rocketed 27.5% in the quarter. It leapt 83% in 2005.

But there were some signs of trouble in emerging markets. The Saudi Arabian stock market, one of the world’s hottest for the last three years, has plummeted 17% since Feb. 25. The Turkish market, another favorite of global investors in recent years, has slumped 10% since late February.

For the U.S. market, the calendar is an issue now: The May-October period historically has brought a much greater risk of losses in stocks than the November-April period, analysts note.

Still, many market bulls say that confidence in world economic growth, and thus in corporate earnings growth, should continue to underpin share prices.

Operating earnings for the S&P; 500 companies are expected to be up 11.3% in the first quarter, according to analysts’ estimates as tracked by Thomson Financial. That would be the 16th straight quarter of double-digit growth, S&P;’s Stovall said.

For stocks, “The trajectory still seems to be up,” he said.

(BEGIN TEXT OF INFOBOX)

Bull run

A sampling of key indexes

Market/index: India/Bombay 500

First-quarter pctg. Change: +19.0%

Market/index: U.S./Russell 2,000

First-quarter pctg. Change: +13.6%

Market/index: China/Shanghai compos.

First-quarter pctg. Change: +11.8%

Market/index: Germany/DAX

First-quarter pctg. Change: +10.4%