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Wall Street Has Tough Act to Follow : Markets: Since across-the-board profits aren't likely to be repeated in second quarter, many experts are betting on stocks.

April 01, 1993|TOM PETRUNO | TIMES STAFF WRITER

Wall Street closed the books Wednesday on its favorite kind of quarter--one in which stocks, bonds and commodities all made money for their owners.

But few market strategists expect investors' across-the-board winning ways to continue this quarter. More likely we'll return to normalcy: What's good for one asset could be another's poison.

And forced to choose, many Wall Street pros say stocks have the best prospects from here, if you believe in a decent but not red-hot economy.

In the strangely profitable first quarter ended Wednesday:

* Stocks gained largely on hopes of an accelerating economic rebound. The Dow Jones industrial average closed Wednesday with a loss of 22.16 points to 3,435.11, but its net gain for the quarter was 134 points, or 4.1%.

Transportation stocks, many investors' favorite bet on an improving economy, rose at double the Dow industrials' pace.

* Lumber, grain, sugar and other major commodities soared in price, reviving long-dormant inflation fears. The closely watched Commodity Research Bureau index of 21 key commodities rose 5% for the quarter.

Gold, which for most of the quarter ignored the gains in other commodities, came on strong in the final days. Gold futures for current delivery jumped $4.80 an ounce Tuesday and 60 cents Wednesday, finishing at $337.60 an ounce versus $332.80 at year's end.

* Interest rates fell for much of the quarter, egged on by the Clinton Administration's deficit-reduction plan--and by expectations that the plan's initial tax hikes will slow economic growth, despite the stock market's bullish view.

The bellwether 30-year Treasury bond yield tumbled from 7.39% at year's end to a historic low of 6.66% early in March.

Though the yield has since rebounded to 6.93% as inflation worries have mounted, investors who owned bonds for the entire quarter still made good money: The average bond mutual fund posted a total return (price appreciation plus interest earned) of about 3.8% for the quarter, according to Lipper Analytical Services. That rivaled most stocks' returns.

The drop in interest rates, meanwhile, also fueled the performance of the quarter's best broad stock group--utilities. They gain as rates fall because their fat dividends look more enticing next to low bond yields.

In the second quarter, many Wall Streeters expect investors to make up their minds about the economic outlook: In theory, what's good for stocks and commodities--a robust economy--should be negative for interest rates. Likewise, a downturn in the economy would hurt stocks and commodities, but reduce rates.

The consensus view among the pros is that economic growth will be strong enough this quarter to support stock prices, too weak to push commodities much higher, and just enough to keep interest rates fairly steady.

"I still think rates will work their way lower over time, but I don't see any great move down from here soon," said Stephen Lieber, manager of the Evergreen Foundation mutual fund in New York.

Lieber's fund, a so-called balanced fund that can shift money between stocks and bonds, now has nearly 60% of its assets in stocks. "I see the bigger opportunities in stocks now" as the economy expands and bonds stall, Lieber said. Among his major holdings: J.C. Penney, banking giant J.P. Morgan and electronics firm AMP Inc.

Ben Zacks, whose Chicago-based Zacks Investment Research tracks corporate earnings, says investors are wrong to doubt that U.S. firms can make a decent profit in a moderate-growth economy. In the fourth quarter, he said, operating earnings for the average industrial company rose 13% from a year earlier. Zacks expects a similar gain in the first quarter.

Still, experts also warn that the first quarter's stock returns probably aren't sustainable for the full year. Wall Street believes that a reasonable annual rate of return on stocks in the '90s will be 8% to 10%. If that holds in 1993, the first quarter's gains represent about half the rise the average stock might realize for the entire year.

And historically, the first quarter often is the stock market's best.

For that reason, investors looking to put money to work today should look for sectors of the market that may have been ignored last quarter, said Bob Beckwitt, who runs Fidelity's Asset Manager mutual fund in Boston.

His two favorite themes: Buy stocks of medium-size companies, such as those represented in the Standard & Poor's mid-cap index, and invest in overseas stocks.

Beckwitt's fund, which like the Evergreen fund can shift among stocks and bonds, now is 50% invested in stocks, 35% in bonds and 15% in money market instruments. And of the 50% share in stocks, four in 10 of those dollars are invested in foreign issues.

"Markets outside the U.S. are where all the real opportunities are, in my mind," Beckwitt said. Europe and Japan "are where we were two years ago," he said--in the midst of steep interest rate declines that will end their recessions and spark dramatic bull markets in stocks.

As for U.S. bonds, Beckwitt says shorter-term issues don't pay enough to justify their risk. He'd buy only long-term Treasuries, or high-yield corporate junk issues.

First Quarter Investment Roundup Stocks post decent gains. . . Led by utility and transportation stocks, the market advanced broadly in the quarter.

*First quarter gain Dow utilities: 9.3% Dow transport: 8.3% Amex market value: 6.1% Dow industrials: 4.1% NYSE composite: 3.8% S&P 500: 3.7% S&P mid-cap: 2.8% NASDAQ composite: 1.9%* . . .even as rates turn up. . . Long term interest rates tumbled early in the quarter on optimism about the Clinton deficit-cutting plan, but have turned higher in recent weeks.

30-year T-bond yield (Weekly closes except latest) Wednesday: 6.93% *. . .On inflation worries. The bond market's big Worry: A sharp jump in a key inflation index that measures 21 commodity prices.

Commodity Research Bureau index (Weekly closes except latest) Wednesday: 212.49

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