Stocks' first quarter was a real downer

By Matt Krantz, USA TODAY
Investors looking back at the first quarter that ended Monday won't have any trouble locating the lowlights. It's the highlights that are harder to find.
Hammered by the failure of Bear Stearns, oil skyrocketing to more than $110 a barrel, historic weakening of the U.S. dollar and rising inflation, the market by most accounts had a terrible first three months of 2008. The Standard & Poor's 500 fell 9.9%, marking its worst quarter in 5½ years. It has fallen five consecutive months for the first time since 1990, says S&P.

"We ended up with a steady diet of bad news," says Noel Lamb, chief investment officer at Russell Investments. "Any highlights were overcome."

Still, as few highlights as there were, they provided some potentially encouraging signs, including:

•Recent dogs perked up Some industries beat up the most badly last year were among the biggest gainers in the first quarter. The best example: Home builders' stocks, which lost half their value last year, gained almost 13.8% in the first quarter, just shy of the top spot held by energy exploration and production companies, which gained a little more than 13.8% on record oil prices. "For a quarter dominated by recession fears, there was good performance by some," says Jim Paulsen of Wells Capital Management.

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•Economy plays were strong. Some investors appeared to be betting that any economic malaise will be short. Residential REITs, which invest mostly in apartment buildings, gained 8.0% during the quarter. And in another vote of confidence that the economy will not grind to a long halt, railroad stocks rose 9.6%. If the economy were truly headed toward a prolonged recession, investors wouldn't be jumping into transportation stocks this soon, Paulsen says.

Meanwhile, earnings forecasts for the broad market are hanging in there. Analysts are calling for 6.5% lower earnings in first-quarter results, says Howard Silverblatt of S&P. But strip out financials' results, and earnings are expected to grow 8.5%. Meanwhile, analysts expect earnings to stabilize in the current quarter, rise 19.3% in the third and jump 73% in the fourth.

Still, many say it's too soon to be focusing too hard on the bright spots. The fact investors are clinging to defensive investments such as gold and shares of companies that make consumer necessities shows caution, says Fa'iz Marhami, portfolio strategist at Rydex Investments. Technology stocks were also weak, helping pull the Nasdaq composite down 14.1%. "Investors are moving to what they feel is less risky," he says.

And while stocks in some industries fared well, all 10 broad market sectors fell during the quarter, S&P says. Even the best group, consumer staples, fell 3.0%. "Sure, we can end up with bits of good news to give us grounds for optimism," Lamb says. But he says more bad news is coming and it "is not all priced in."