A Gloomy Quarter Ends, and Investors Look Ahead

March 31, 2001


A Gloomy Quarter Ends, and Investors Look Ahead

By ALEX BERENSON

one of Wall Street's longest winters ever finally ended yesterday, as investors closed a miserable quarter with a muted rally.

Three months ago, the mood on Wall Street was guardedly optimistic. After plunging through the fall, the market as a whole seemed reasonably valued, if not exactly cheap.

Optimistic strategists like Abby Joseph Cohen of Goldman, Sachs expected the market to rebound solidly in 2001. And when the Federal Reserve unexpectedly cut short-term interest rates on Jan. 3 by one-half percentage point in an effort to stimulate growth, investors bought stocks with abandon, pushing the Nasdaq composite index up 14.2 percent for the day.

But the rally soon fizzled, even though the Fed cut rates a second time on Jan. 31. By the end of February, stocks were lower than they had been before the Fed's first rate cut. March brought further declines.

"Every strategist on the street, including myself, put together a table of how stocks do 12 months after the first rate cut," said Ed Yardeni, chief investment strategist at Deutsche Banc Alex. Brown. "Then we did it after the second cut. Then we did it after the third. And while we were putting out this happy news, stocks kept going down."

The market's problems reflect the weakness in the economy, which has slowed to a crawl after years of strong growth. Information technology companies, which led the boom, have been hardest hit, with many posting weaker-than-expected earnings and layoffs.

With no end to the slowdown in sight, investors are shedding the technology and telecommunications stocks they wanted so desperately for most of the 1990's.

After falling more than half from its peak last March, the Nasdaq composite index dropped another 25.5 percent this quarter, losing 630.26 points to close at 1,840.26. (Yesterday, the Nasdaq gained 19.69 points, or 1.1 percent.) It was the fourth-worst quarter ever for the Nasdaq. The worst was last fall, when the index fell 32.7 percent.

"This was one of the ugliest quarters we've seen in a long time," said John Morosani, manager of the $240 million ING Barings Furman Selz small-cap value fund. "What you really saw was the unwinding of all the excesses that were put in place in 1998, 1999 and the first months of 2000."

Individual technology stocks, even market leaders like Cisco Systems, have been even harder hit. Cisco shares dropped another 59 percent for the quarter and are now down more than four-fifths from their peak last March, wiping out more than $400 billion in shareholder wealth. Cisco closed yesterday at $15.81, up 56 cents.

Broader market indexes also suffered this winter, although not as badly. The Standard & Poor's 500 index lost 159.95 points, or 12.1 percent, to finish the quarter at 1,160.33. The drop put the index into a bear market for the first time since at least 1987. (Wall Street generally defines a bear market as a prolonged fall of 20 percent or more in a major index; there is some debate whether the October 1987 crash qualifies, since stocks began to rebound almost immediately after their plunge.)

The Dow Jones industrial average, which is less weighted to technology than the other major indexes, showed the most strength. The Dow lost 908.07 points, or 8.4 percent, to close the quarter at 9,878.78, on top of its 6.2 percent loss last year. (The Dow rose 79.72 points, or 0.8 percent, yesterday, while the S.& P. 500 picked up 12.38 points, or 1.1 percent.)

In a surprising exception to the woes of many technology stocks, Microsoft was the Dow's strongest component for the quarter. Microsoft rose 26.1 percent, after losing 63 percent last year, as investors grew more optimistic about the company's chances for resolving its antitrust battle. Other winners included Philip Morris, the tobacco and food giant, which rose 7.8 percent, on top of a 91 percent gain last year.

Despite this quarter's problems, many strategists remain optimistic that the market is overdue for a rebound. The Fed's rate cuts are certain to help the economy eventually, and on a price-earnings basis, the overall market is no longer expensive, the bulls say. Even some longtime bears have begun to change their stance.

"The market looks a lot better under the surface than it does upfront," said Christine A. Callies, the chief American investment strategist for Merrill Lynch. She noted that many stocks actually bottomed in the fall, and that the stocks of companies whose fates are closely tied to economic growth have already begun to rally. Their gains show that the worst of the slowdown may be over and that some investors are anticipating a recovery, Ms. Callies said.

"In the first few months of a Fed policy change, not everybody thinks it will work," Ms. Callies said. "I don't think that the turn the market wants to see is very far away. I think there should be a sustainable rally in the second quarter."

Then again, lots of investors thought that about the first quarter, too.

Treasury Prices Rise By Reuters

Treasury bond prices rose yesterday as a report showing manufacturing activity in the Chicago area sank to 19-year lows in March as separate reports showed consumer confidence and spending remaining resilient.

"I think that the Chicago data is going to suggest to a lot of people that the Federal Reserve is going to have to act more aggressively again and doesn't have time to waste," said Kim Rupert, senior economist at Standard & Poor's MMS.

The 10-year Treasury note rose 2132, to a price of 1002332. The note's yield, which moves in the opposite direction from the price, fell to 4.90 percent from 4.99 percent on Thursday.

The price of the 30-year Treasury bond rose 2132, to 983032. The bond's yield fell to 5.44 percent from 5.49 percent on Thursday.