Suffering and Hope

Now That Investors Can Breathe Again, Can the Market Sustain the March Rally?

NEW YORK -- The first quarter ended on an upswing. But now comes the hard part: sustaining it.

For mutual fund investors desperately trying to recoup their retirement savings, the March rally in U.S. stocks may look encouraging. But their stocks are still off by more than 46 percent from 16 months ago, and market strategists say it could be a long time before they claw their way back.

For one thing, it is not certain that the worst of the crisis is in the rearview mirror, despite recent signs suggesting that the economy may be stabilizing and the credit markets recovering. Some analysts say stocks could fall below the 12-year lows of four weeks ago if new data indicate a deepening recession or bad news emerges from the financial sector, whose shares have led the rally. Corporate earnings start coming in next week, and at least a few, some market watchers said, are bound to be uglier than the already-lowered expectations.

"Lots of things still could go wrong," said Jerry A. Webman, chief economist of OppenheimerFunds, who added that the economy could start expanding again early next year. "It's just that things are not getting worse . . . and everyone's feeling a lot better all of a sudden."

Until the rally kicked off March 10, the Standard & Poor's 500-stock index was down 25 percent for the year. Since then, stocks have risen significantly, helped by positive statements from major banks on their profitability and economic reports that showed that conditions had either inched up from historic lows (home sales, consumer confidence) or gotten worse at a slower rate (manufacturing activity, construction spending).

Market participants are also buoyed by the government's ongoing stimulus efforts, which have helped ease their concerns about a worst-case scenario -- depression and a systemic financial collapse. Most notably, the Federal Reserve in mid-March said it would flood the financial system with an additional $1.2 trillion to buy government bonds and mortgage-related securities.

For the quarter, the S&P finished down 11.7 percent. The Dow Jones industrial average of 30 blue-chip stocks lost 13.3 percent. The tech-heavy Nasdaq composite index shed 3.1 percent.

Mutual funds that invest in diversified U.S. stocks lost 8.9 percent on average, according to Lipper, a fund-tracking firm. World equity funds dropped an average of 9.7 percent, while emerging-market funds shed 1.8 percent.

Funds that invest in shares of large U.S. companies did better than those that focus on small-caps, reflecting investors' desire to stick with more stable, well-known names in perilous times. Growth funds far outperformed value funds, in part because high-performing tech shares tend to be categorized as growth stocks. All of these fund types, however, finished in the red for the quarter.

Among sector-specific funds, gold-oriented funds posted a 10.7 percent gain as investors sought a safe haven from plunging equities. The only other fund type in the category to finish positive was science and technology funds, which gained 3.8 percent, Lipper said. Although they reversed their direction in March, financial services funds lost 23.7 percent for the quarter, while real estate funds dropped 30.1 percent. The two were the worst performers among the sector funds.

Investors who were counting on income from dividends, if not stock price appreciation, may also have been disappointed. In the first quarter, S&P 500 companies eliminated $42 billion in dividends, surpassing the record $15.9 billion in cuts in the fourth quarter of 2008, according to S&P.

Overall, bond funds did better than stock funds. For the quarter, the average taxable domestic fixed-income fund returned 1.8 percent, according to Lipper.