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Raining Dogs

In his view, "It's still very early in the cycle." He said that the industry's excess capacity is at its lowest level since the early 1970s -- the beginning of a strong multiyear cycle for oil stocks. MacKenzie expects strong demand from the populous, rapidly growing countries of India and China to drive long-term demand. "Per-capita annual oil consumption in China is just two barrels," he noted. "That's comparable to where Japan was in the 1950s and South Korea was in the mid-'60s."

What Has Changed

Whether or not the quarter marked a turning point for the broad stock market, it included several major reversals of trends in place for the past few years since the market collapsed in early 2000.

_____1st Quarter Scorecard_____
Research your mutual funds' performance for the first quarter of 2005:
Biggest Funds
Best Performing Funds
Worst Performing
Get More Funds Quotes
_____Mutual Funds Report_____
As Dow 11,000 Fades Further, Inflation Colors Assessments (The Washington Post, Apr 3, 2005)
Waiting for Greenspan (The Washington Post, Apr 3, 2005)
Sector ETFs Allow Investing in Trends (The Washington Post, Apr 3, 2005)
_____Funds Q&A_____
Transcript: Washington Post reporter Ben White was online to answer questions about how inflation worries are influencing stock and mutual-fund performance.
_____Earnings Watch_____
Jos. A. Bank Earnings Rise 31 Percent (Reuters, Apr 4, 2005)
Jos. A. Bank Posts Higher 4Q Profit (Associated Press, Apr 4, 2005)
Service Corp Sees Earnings Fall (Associated Press, Apr 1, 2005)
Best Buy to End Rebates, Reports Earnings (Associated Press, Apr 1, 2005)
Best Buy to End Rebates, Reports Earnings (Associated Press, Apr 1, 2005)
More Earnings News
_____The Markets_____
Dow Over 12 Months
Nasdaq Over 12 Months
S&P 500 Over 12 Months

For one, small-cap stocks are apparently relinquishing their market-leading role. Small-cap "core" funds, which hold a mix of growth and value stocks, had gained 31.33 percent in the past two years, compared with 26.98 percent for mid-caps and 17 percent for large-caps.

And global equity funds, after two years of outperforming their U.S. counterparts, began to lose their luster. Though world equity funds fared better than diversified domestic stock funds, dipping just 0.12 percent, it's a far cry from their longer-term out-performance. World equity funds rose 11.95 percent in the past year and 33.32 percent for the two-year period, compared with 5.85 percent and 22.26 percent, respectively, for U.S. funds.

In another about-face, returns for bond funds, a perceived safe haven since the tech bubble burst in 2000, finally turned modestly negative. The average U.S. long-term bond fund declined 0.64 percent for the quarter, and some experts think that bonds may be approaching the end of their long bull market.

Specter of Higher Inflation

Much of what ails the markets is traceable at least in part to inflation worries. For the first time in the 40-month recovery, investors worry that real or anticipated inflation may force the Federal Reserve to become more aggressive in raising interest rates, a policy that could depress consumer spending, including home buying and business hiring and investment, eventually cutting into corporate profit. That scenario is ultimately bad for most stock and bond investments.

While bonds are on the front lines in a rising rate environment, because bond prices move inversely to yields and higher rates raise corporate borrowing costs, stocks won't escape unscathed.

Economists have long touted stocks as an effective hedge against inflation, but Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School and author of the classic "Stocks for the Long Run," says stocks are not good inflation hedges in the short term.

A flare-up in inflation means that while stocks now compete with higher-yielding bonds, a company's future earnings and dividends are worth somewhat less.

"But in the long run, stocks are very good inflation hedges, because the value of a company's assets, such as land and equipment, should move up in line with the price level once inflation is under control, and stocks will do well," Siegel said.

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