Rude Awakening

Stocks Took a Surprising Dive, And More Jolts May Be Coming

NEW YORK

Buckle up, investors: Turbulence is back in the stock market, and analysts say it's going to stick around for a while.

The ongoing turmoil arrived abruptly in late February, when a sell-off in the Chinese stock market jolted investors around the world, triggering the biggest one-day drop in the Dow Jones industrial average in four years and ending several months of steady gains.

Since then, stocks have seesawed sharply, as investors sift through mixed signals on the economy. Mortgage industry problems, a sputtering housing market and uncertainty about the direction of interest rates are all fueling market jitters. However, while economic growth has slowed considerably, unemployment remains low and corporate dealmaking continues at a record pace.

"If you're really just looking to make a call on the macro-economic factors, your visibility is pretty poor right now," said Brian Angerame, a portfolio manager at ClearBridge Advisors, which is owned by Legg Mason. He noted that other wildcards are lurking, such as the recent rise in oil prices and ongoing geopolitical tensions in the Middle East.

By the end of the first quarter, stocks had climbed back close to where they began the year. The Dow finished down nearly 1 percent, but the blue-chip index had been off as much as 3 percent in early March. The broader Standard & Poor's 500-stock index gained 0.2 percent, while the Nasdaq composite index rose 0.3 percent. The Russell 2000 index of small companies fared better, gaining 1.7 percent.

Most market watchers do not expect stocks to take off in the second quarter. Robert Doll, global chief investment officer of equities at BlackRock, said he anticipates that the economic slowdown will crimp corporate earnings and that this might make share prices less stable.

"We're in a period of growth scare for the U.S. economy," he said. "We're going to have more volatility in both directions."

Doll thinks profit growth, which had been in the double digits for the past four years, will slow to 5 percent this year. He said the broader stock market can still return up to 10 percent for the year -- provided inflationary pressures ease and the Federal Reserve lowers interest rates.

"It'll be a bumpier ride to get there," he said.

In recent weeks, the Federal Reserve has sent mixed messages about where its benchmark short-term interest rate is headed. After a monetary policy meeting March 21, the central bank issued a statement omitting language it had previously used to indicate the likelihood of interest rate increases. Investors pounced on the change as a sign of a pending rate cut and sent stocks soaring.

But a week later, in testimony to Congress, Fed Chairman Ben S. Bernanke said fighting inflation was still a priority, dousing Wall Street's hopes for a rate cut. Stocks tumbled on the news.