Stocks Post Gains for Second Quarter

Economy's Hints of Stability Break Long String of Losses

Wall Street closed its first positive quarter in more than a year and a half yesterday, capping a massive rally built on hopes for an economic stabilization that has yet to materialize.

The Dow Jones industrial average rose 11 percent during the second quarter, its biggest quarterly jump on a percentage basis since 2003. The Standard & Poor's 500-stock index climbed 15.2 percent, its largest quarterly increase since 1998. Financial stocks rose the most during the quarter, jumping 35 percent, though they are still down more than 60 percent from their peak in 2007.

Investors have largely left behind the fears of a severe global recession that sent stocks to their lowest level in 12 years in March. Stocks are up more than 30 percent since then, and both the S&P 500 and the Dow have recouped most of their losses for the year.

"In this quarter, stock behavior was pretty encouraging," said John Wilson, chief technical strategist for Memphis-based Morgan Keegan, an investment banking firm. "We had one of the fastest, sharpest rallies in several decades."

But new uncertainty about the economic recovery has crept into the market in recent weeks, and it could leave stocks stagnant this summer, analysts said. That insecurity emerged yesterday as stocks lost ground after a reading of consumer confidence slipped more than expected and a new housing report showed that home prices have fallen to 2003 levels. The Dow, an index of 30 blue-chip stocks, fell nearly 1 percent, or 82.38 points, to close at 8447.00, while the broader S&P was down 0.9 percent or 7.91 points, to 919.32. The tech-heavy Nasdaq was down 0.5 percent, or 9.02 points, to 1835.04.

"For the market to take another step forward, we're going to have some actual good news, rather than the less bad stuff that had been the theme of the second quarter," said Carl Beck, a partner with Harris Financial Group in Richmond.

Wall Street is entering a potentially volatile period as investors compare their expectations against a fresh round of economic and corporate reports. They include tomorrow's release of a report that many analysts expect will show the national unemployment rate creeping closer to 10 percent. Then starts a potentially brutal earnings season, when corporations issue results for the second quarter. Many analysts expect another flood of weak reports, with profits down significantly at most companies.

Stocks are unlikely to extend last quarter's gains through the summer, as investors take profits and wait for the expectations built into the recent rally to appear, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "There are some wild cards out there," he said.

To begin chipping away at the massive losses from 2008, when Dow stocks lost more than 30 percent of their value, the economy needs to show real improvement, analysts said.

Investors have regained some confidence since last year's dismal performance, said Bill Stone, chief investment strategist for Philadelphia-based PNC Wealth Management. "But they're still struggling to judge the timing and strength to the recovery," he said. "We're going to grind higher, but it's not the skyrocket we had before."

In the current environment, beating earnings expectations will not be enough. Corporations can surpass low profit forecasts by cutting costs, analysts said. But boosting revenue depends on improvement in the broader economy, they said.

"We all know everyone is cutting costs, the unemployment rate is nearly 10 percent for goodness sakes, that is the easy part," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "But are these people selling anything to anybody?"