Ouch, That Hurt

Mutual Funds Took a Beating Last Quarter, and Experts Disagree on When Healing Will Begin

NEW YORK -- Take shelter in large, stable companies? Forget about it. Flee to overseas stocks? Not a chance. How about the once red-hot Chinese market? That didn't work either.

From large-cap funds that invest in big, quality companies to international stock funds, which enjoyed years of consistent growth, to bond funds traditionally considered to be safe, there were few mutual fund categories that didn't bleed red in the first quarter as the credit crisis sent global investors running for cover.

"It was a rough quarter," said Craig Hester of Hester Capital Management. "There was no place to hide. . . . In hindsight, everybody should have been in 100 percent cash."

Many money managers say the credit crunch will produce more flare-ups and disappointments in the coming months. As debate turns from whether a recession is on the way to how deep it will be, the question becomes when the financial markets can start their long healing process, and how many more shocks investors have to stomach before that happens.

Some, like Hester, are hopeful that markets endured the worst of it in the first quarter and that the government interventions in recent months will soon induce a recovery.

But others are not hazarding a guess. Too often, the stock market's rallies have turned out to be short-lived.

"It makes it very difficult to find investments you can have confidence in when you have strong headwinds in the economy," said Ryan Jacob of the Jacob Internet Fund, which fell 16 percent in the first three months of the year. "In terms of what the rest of the year will bring, no one knows."

Investors will get a sense of how companies are holding up under slower consumer spending and reduced access to credit when they begin reporting earnings this week. Investors will pay particular attention in mid-April, when Citigroup, Merrill Lynch and Bank of America, three financial giants that have reported billions of dollars in write-downs, disclose their quarterly performances. Losses substantially larger than what Wall Street is expecting will probably further dent investor confidence and lead to another broad sell-off, analysts said.

One important measure of the economy came Friday, when the Labor Department said 80,000 jobs were lost in March, more than analysts anticipated. It was the third consecutive month of losses.

"The recession bell has rung for the U.S. economy," said Stuart Hoffman, chief economist at PNC Financial Services Group. "The loss of jobs is very widespread."

Nonetheless, Hoffman said he is still in the camp that believes the recession will be shallow. He predicted the economy will recover in the second half of the year as it begins to feel the effects of multiple Fed interest rate cuts and the stimulus package signed in February by President Bush, which should give consumers a shot in the arm. Consumers fuel two-thirds of the economy.

With more help from a slowing but healthier global economy and a housing market that may start to bottom out this fall as prices become more attractive for home buyers sitting on the sidelines, the U.S. economy will be on a path to slow growth, Hoffman said.