March 31, 2012 in Business

Stocks post smiles in first quarter

Best showing since 1998 exceeded expectations
Bernard Condon Associated Press
 
Associated Press photo

Specialist Paul Cosentino, right, directs trading in shares of Regions Financial Corp. on the floor of the New York Stock Exchange earlier this month.
(Full-size photo)

The bulls weren’t bullish enough.

The stock market just had its best first quarter in 14 years. The surge has sent Wall Street analysts, some of whose forecasts seemed too sunny three months ago, scrambling to raise their estimates for the year.

“That it’s up isn’t surprising. It’s the magnitude,” says Robert Doll, the chief equity investment manager at BlackRock, the world’s biggest money manager.

Doll says stocks could rise 10 percent more before the end of the year. That would be enough to push the Dow Jones industrial average to an all-time high and the Standard & Poor’s 500 close to a record.

For the first three months of the year, the Dow was up 8 percent and the S&P 12 percent, in each case the best start since the great bull market of the 1990s. The Nasdaq composite index, made up of technology stocks, has had an even more remarkable run – up 19 percent for the year, its best start since 1991.

“I don’t think anyone could have predicted this,” says Chip Cobb, a senior vice president at Bryn Mawr Trust Asset Management. For these gains, he says, “I thought it would take all year.”

The jump gives money managers like Cobb hope that ordinary folks burned by two deep bear markets in a decade will start buying again, propelling the indexes even higher.

In a remarkable act of self-restraint – or foolishness, depending on your view – they have mostly stayed out of the market. One reason they may jump in now is that fear of looming disasters, like a full-blown debt crisis in Europe or a second recession in the United States, has faded.

Bulls say investors will turn their attention to the only thing that really matters for stock prices in the long run – corporate profits.

Another hopeful sign is that those who have been buying stocks appear to be taking bigger risks than before, suggesting growing confidence.

Last year, investors put much of their money into so-called defensive stocks, such as utilities and health care companies, which make money in bad times as well as good. This year, it’s the risky fare that’s being scooped up.

Financial stocks are up 22 percent, the best among the 10 industry groups within the S&P. Technology companies are up 21 percent. Consumer discretionary stocks, like hotels and cable companies, are up 16 percent.

Utilities are down 3 percent for the quarter, the only group in the red.

The Dow is less than 1,000 points away from its all-time high of 14,164.53, set Oct. 9, 2007. The S&P is about 150 points from its record close of 1,565.15, set the same day.

The first day of the year set the tone. On Jan. 3, the Dow rose 180 points. Later that month, the Federal Reserve said it would probably keep benchmark interest rates near zero for almost three more years. That sent stocks to their highest levels since May 2011.

It was the best January for stocks since 1997. Skeptics pointed out that profits at U.S. companies, after jumping by double-digit percentages for eight quarters in a row, seemed to be growing more slowly. They also worried that the number of shares of stock traded each day was low, which suggested a lack of conviction by buyers.

Stocks kept climbing anyway, passing two milestones in quick succession.

On Feb. 28, the Dow rose above 13,000 for the first time since May 2008, four months before the financial crisis hit that September. Two weeks later, it was the Nasdaq’s turn. It crossed 3,000 for the first time since the dot-com frenzy a dozen years earlier.

Even a few duds got caught in the upswing. The stocks of Microsoft and Cisco have barely budged this century. This year, they have have risen 24 percent and 17 percent, respectively. Dell, which has languished for years, is up 13 percent.

Some of the big winners of 2012 are perhaps less surprising: Apple has risen 48 percent. Lions Gate Entertainment, the company behind the hit movies “The Hunger Games” and “Twilight,” is up 67 percent.

Some investors say the bulls are fooling themselves if they think big profits this year are assured. Indeed, first-quarter profits for the S&P 500 are expected to fall 0.1 percent from a year earlier, according to a survey of analysts by FactSet, a provider of financial data.

That would be the first time in more than two years that earnings will not have grown. For the full year, analysts are expecting profits will rise a healthy 9 percent, but those predictions depend on a surge of 16 percent in the last three months.

“The idea that we’re going to have a huge rebound at the end of the year is unrealistic,” said Barry Knapp, head U.S. equity strategist at Barclays Capital.

Knapp says he’s bullish on technology stocks but the rest of the market has “overshot the fundamentals.” He said he’s sticking with his target for the S&P this year: 1,330, which would be a drop of about 6 percent from Friday’s close.

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