After a solid first quarter, can stocks move higher?

There are plenty of reasons to be bullish about stocks, but the market faces big challenges first. For instance, can energy stocks, which had a huge quarter, continue to lead the market higher?

By Charley Blaine Mar 31, 2011 11:42PM
Charley BlaineWith Thursday's close, the stock market stood pretty much like it did at the end of February. Literally. And that was a victory. On March 16, the major indexes were all down more than 5% for the month.

The first quarter was a happier tale. Thanks to the market's gains over the last two weeks of the month, the quarter ended as a solid winner.

The Dow Jones industrials ($INDU) finished 6.7% higher for the quarter, with the Standard & Poor's 500 Index ($INX) up 5.6% and the Nasdaq Composite Index ($COMPX) up 4.7%. The small-cap Russell 2000 Index ($RUT.X) was even stronger, up 7.6% for the quarter.

It was the seventh quarter in the last eight with gains for all four indexes. It was the best first quarter for the Dow since 1999 and the best for the S&P 500 since 1998. For the Nasdaq and the Russell, the comparisons are more plebeian. They both had their best first quarters since, well, a year ago.

But now the hard work will come.

Article continues below.

 

The domestic economy may be looking stronger right now. Manufacturing activity has strengthened substantially. Friday's jobs report suggested that a jobs recovery was gaining traction. The unemployment rate dropped to 8.8%, and nonfarm payrolls grew by 216,000.

 

Investor confidence that stocks will rise over the next six months hit 41.8% in the latest survey of the American Association of Individuals. That's the first time since mid-February that the confidence level is above its long-term average of 39%. 

 

Consumer moods, however, have been darkening as the price of gasoline has neared $4 a gallon. There's a miserable housing market in much of the country. Prices for food, clothing and other daily essentials have been rising.

Turmoil reigns in North Africa and the Middle East. The March 11 earthquake and tsunami in Japan are causing problems for the global auto and electronics industries. How large an impact the catastrophe will have on the rest of the global economy is unclear.

Oh, and did we mention the possibility that the federal government may shut down?

Or that there's a good chance that interest rates may be moving higher? Indeed Minneapolis Federal Reserve Bank President Narayana Kocherlakota predicted on Thursday a rate increase by year's end if core inflation rises.

Or that Europe faces continuing problems with its banks? Ireland is likely to take majority ownership in its six largest banks after a stress test of its banking sector found the banks probably needed to raise $33 billion in new capital.

Despite all that worry, the stock market does have a few things going for it:

  • The most powerful catalyst for the first quarter -- rising energy prices -- are going to continue to power the market going forward. At least that's what investors around the world are betting.
  • The energy bet -- as well as the bet on copper, steel, rare-earth minerals -- is tied up in the assumption that the global economy will continue to grow, especially in Asia. 
  • Despite the scary issues facing investors, the market is betting they can be overcome. Why else would stocks rise in the last two weeks?
  • There's pent-up demand among companies around the world to buy other companies. Hence AT&T's (T) proposed $39 billion acquisition of T-Mobile USA from Deutsche Telekom, Deutsche Boerse's acquisition of New York Stock Exchange parent NYSE Euronext (NYX). And there are a lot of people betting that banks will start merging like mad.
Energy leads the market in the first quarter
Higher oil prices resulted in energy stocks, especially oil service stocks, rising the most in the quarter. The energy sector of the S&P 500 was up 16.7% at Wednesday's close.

And the expectation is that increasing global demand for oil, natural gas, coal and oilfield services will push the sector higher.

Whether this comes true depends. Rising gasoline prices above $4 a gallon in the United States will result in changing driving habits, deferred vehicle purchases and, probably, a wariness about making big discretionary purchases. Businesses that depend on consumers being able to travel easily to them will suffer. Like resorts, golf courses, regional theaters, department stores. 

With light sweet crude up more than 15% this quarter and Brent crude up more than 23%, energy stocks had a boffo first quarter.

Tesoro (TSO), the big independent refiner, was up 45% for the quarter, tops among S&P 500 stocks; an additional six energy companies are in the S&P top 20.

Oil service giants Baker Hughes (BH), Halliburton (HAL) and Schlumberger (SLB) are up 29%, 21% and 12% for the quarter so far, respectively. 

Chevron (CVX) has been the second-best performer among the 30 Dow stocks this quarter, up nearly 19%, with Exxon Mobil (XOM) the fifth-best Dow stock.

Next closest were industrial stocks. The industrial sector of the S&P 500 started today with a 7.8% again. A big leader: Caterpillar (CAT), up 8.4% for the quarter and 19% for the year. It's the top performer of the 30 Dow stocks in February, March and the quarter.

In fact, the two sectors alone are responsible for 60% or so of the S&P 500's gain for the quarter.

Financial shares struggle
The other sectors had OK quarters, but financial stocks were beaten up for much of March. Investors were worried about regulation battles, weak loan demand and what would happen to the huge pools of bad mortgages on the books.

Bank of America (BAC), down 5.9% in March, was a big drag on the group. The bank is still struggling to get control of its big mortgage business and other issues. Evidence of the struggle came when the Federal Reserve wouldn't approve the bank's plan to reinstate a dividend.

Even mighty JPMorgan Chase (JPM) and Berkshire Hathaway (BRK.B) were hit by the downdraft. 

Tech stocks wane in March
Among technology stocks, March was frustrating, although the quarter was strong.

Semiconductors were mostly lower; the Philadelphia Semiconductor Index ($SOX) was off, Apple (AAPL) was down 1.3% (but up more than 8% in the quarter), despite the enthusiasm for the iPad 2. The shares peaked on $363.13 on Feb. 16 and have only occasionally crossed $360 since.

The problems were the uncertainty about whether it will face component shortages after the Japanese earthquake and continuing worries about CEO Steve Jobs' health. 

Google (GOOG) dropped more than 4% during the month and 1% for the quarter. Microsoft  (MSFT) fell 4.5% for the month and 9% for the quarter. (Microsoft is the publisher of MSN Money.)

But Netflix (NFLX) remains one of the market's darlings, up more than 15% for the month and 35% for the quarter. And 331.6% since the end of 2009.

Automakers and airlines feel the pain
Automakers suffered from worries about what higher fuel prices would do to their businesses. Ford Motor (F) fell 1% in March and 11.2% for the quarter. General Motors (GM) dropped 7.5% in March and 15.8% for the quarter.

Toyota (TM) bucked the trend, sort of. Its American Depositary Units were up 2.1% for the quarter but down 13.2% for the month. It was already falling when the Japanese earthquake struck. Honda Motor (HMC) fared similarly: down 14.2% for the month and 5% for the quarter.

Like automakers, airline stocks were hit by rising fuel costs, although most of the damage came before March.

Delta Air Lines (DAL) fell 12.8% in the month and 22.2% for the quarter. American Airlines parent AMR (AMR) dropped 4.2% for the month and 17% for the quarter.

Three winners: Whole Foods, Priceline.com and Starbucks
It's important to note three big performers in retailing: Whole Foods (WFMI), up 12.5% for the month and 30% for the quarter; Priceline.com (PCLN), up 11.6% in the month and 26.8% for the quarter; and Starbucks (SBUX), up 12% for the month and 15% for the quarter.

What makes the gains interesting is that all three built on gains leading into March and were able to move higher in the month. All three have loyal audiences. In Starbucks' case, the company has made a strong rebound after nearly running aground when the financial crash began.
4Comments
Apr 1, 2011 8:34AM
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Brent -

 

Wall Street is like a giant casino.  They get to set the rules, use other people's money, skim a little off the top, and get bailed out when they lose.  All it costs them is a few billion per year to buy off politicians (from both parties).  What's not to like?

Apr 1, 2011 1:23AM
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will the market crash in or before october(said to be ripe month for crashes) this year after dismal summer figures(sales/ employment)?

 

thumbs up or down will do!

Apr 1, 2011 1:05AM
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depends on how much benny wants to print off.......another 600 billion may help!
Apr 1, 2011 6:34AM
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The Wall Street pigs are going to put us back into another recession or depression with their Greed. We have plenty of oil, yet these bastards keep bringing it up for their own gain. Wall Street is nothing but a playground for the rich and to hell with the rest of the country. They are living in a dream world, but the walls will come crashing down as we are headed for another meltdown courtesy of Wall Street.
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