Ouch, That Hurt

Though the downturn has not been sharp, FTN Financial's chief economist, Christopher Low, is not so sure the recession will be that mild. The stimulus package may help consumer spending temporarily, but it "won't do a whole lot in the grand scheme of things," he said. And the Fed, though it acted early and aggressively, faces big challenges in persuading banks to lend, he said.

"Unfortunately . . . the Fed is fighting a collapse of confidence in the credit market that is entirely justified," Low said, adding that with gloomy prospects for income and job growth, the only way consumers can increase spending is to borrow. "It's hard to imagine a great deal of credit being extended as long as default rates are hitting new highs. . . . I'm confident the second quarter will be worse than the first quarter."

The first quarter certainly wasn't pretty. It began with a sell-off as a series of worrying economic data came into focus: The unemployment rate jumped. Job growth ground to a near-halt. Retail sales were slowing, manufacturing activity was weakening. Commodity prices, such as oil, were soaring to record highs, feeding worries of stagflation -- a toxic mix of stagnant growth and inflation.

Meanwhile, Citigroup and Merrill Lynch reported the worst quarterly losses in their histories.

As investors lost confidence, parts of the credit market previously thought to be safe froze up. Municipal bond prices fell. So did high-quality mortgages backed by Freddie Mac and Fannie Mae. Funds failed, including one managed by District-based private-equity giant Carlyle Group. Last month, investment bank Bear Stearns was forced to sell itself to rival J.P. Morgan Chase to avoid bankruptcy.

The Standard & Poor's 500-stock index finished the quarter down 9.9 percent, its worst performance since 2002. The Dow Jones industrial average dropped 7.6 percent. The tech-heavy Nasdaq composite index declined 14.1 percent.

Every sector finished the quarter lower. Hardest hit were financials, telecom and technology shares, which all fell about 15 percent.

Most mutual funds that invest in stocks lost money, with diversified U.S. stock funds falling an average 10.1 percent, according to Lipper, a fund tracking data firm. World stock funds lost 9.6 percent; emerging-market funds fared worse, falling 11.7 percent. China region funds dropped a whopping 21.2 percent.

Investors pulled nearly $35 billion out of U.S.-based equity mutual funds in the first quarter, including 5.4 billion from those that invest in overseas stocks, according to preliminary data from AMG Data Services, which tracks fund flows. Taxable bond mutual funds had inflows of $40 billion, helped by money pouring into funds that invest in safe U.S. Treasurys and investment-grade corporate bonds and despite outflows from junk bonds.

In the United States, large-cap growth stock funds shed 11.6 percent, while small-cap growth funds fell 14.9 percent, Lipper said. Bear-market funds that short, or bet against, stocks rose 11.9 percent.

Of the sector-specific funds, real estate funds shed just 1.2 percent, reflecting some investor optimism that the beaten-down market may be hitting bottom. Natural resources funds, helped by rising commodity prices, also escaped relatively unscathed, losing 4.5 percent. Gold-oriented funds rose 5.2 percent.

With red just about everywhere, what's an individual investor to do?