Still, the fundamentals that drove stock and bond prices higher in 1995—moderate economic growth and low inflation—remain in place. Until those factors change, it's probably premature to shift significant amounts of money out of stocks and bonds and into safe havens. Such havens include money-market accounts or precious metals, which can protect your principal when the financial markets tumble or inflation flares out of control. Gains Came Early Although the average U.S. stock mutual fund rose a healthy 5.65 percent in the first quarter of 1996, according to Lipper Analytical Services, a fund-tracking service based in Summit, N.J.. all of that gain came before Feb. 22. Since then, the stock market has bounced around crazily, with a hair-raising loss of 171 points by the Dow Jones industrial average on March 8. For all that, the Dow finished the first quarter at near-record levels. Action was much more consistent—consistently bad—in the bond market, as the average domestic bond fund tracked by Lipper fell 0.90 percent for the quarter. Some of the money that investors drew out of the stock and bond markets found its way into gold-related issues.
Lipper reports that mutual funds that invest principally in gold stocks rose an average of 22.76 percent in the first quarter, making them one of only three fund categories to post a double-digit gain for the period. The other two categories were natural-resources funds and Latin American funds. At the other end of the spectmm, only one of Lipper's stock-fund catiigories—ut i I ity funds—fell during the quarter, with a loss of 0.19 percent. Utility stocks are interest- rate sensitive and often move with bonds.
Disagreement On Gold While many money managers expect the gold market to settle down, some, such as James Turk, strategic adviser of the Midas Fund, are looking for further gams. The Midas Fund invests primarily in gold-related stocks and ranked eighth in performance among mutual funds of any type during tin first quarter, with a gain of 35.76 percent.
"We believelhat for I he near term, we've gone into a $395 to $415 [per ounce] trading range for gold, replacing lasl year's $375 to $395 trading range," Turk says. (The metal finished the Brst quarter just under 1396.) "Later, maybe in the second half of the year, we're going to see gold move higher into the $400s, above $415 to $425." But even Turk isn't suggesting that investors swap all their funds for gold or gold stocks. "I always recommend diversification in an investment portfolio,'1 he says,
A Shaky Analysis?
The key catalyst for the behavior of the financial markets in the first quarter was the Fed's decision not to cut short-term interest rates, reflecting Chairman Alan Greenspan's sense that the economy was healthy enough to continue growing without allowing businesses or consumers to borrow money at lower rates. Ironically, that analysis began to look shaky midway through the quarter, when several big technology companies, led by Digital Equipment Corp., began to warn Wall Street that their earnings for the first quarter wouldn't be up to expectations because of the slowing demand for personal computers. Still, the tremors such forecasts inflicted on the broad stock market may have been overblown.
'There's not a lot of history of economies dymg out on their own," observes Richard Hoey, chief economist at Dreyfus Corp. and manager of three of the company's mutual funds, including Dreyfus Growth & Income. "Usually, what triggers recessions is a surge in inflation that is resisted by a tightening" of the money supply by the Federal Reserve, he says. "We don't yet have a surge of inflation, and we don't yet have the Fed tightening."
Hoey sees the economy continuing to expand through the remainder of the year, with subcycles of faster and slower growth. "We've just ended a subcycle of slower growth; now we're going to see a faster pace for a couple of quarters," he says.
"Despite that, its going to be tough to get much in the way of gains in corporate profits," Hoey adds. "Product pricing isn't that strong, we no longer have falling interest rates to help reduce interest costs, and we've got a little bit of cost pressure from the rise in oil prices early in the year. That will feed through the system for a while."
Large Firms Suffer Most
When corporations have trouble increasing prices for their goods or services, it is often the largest companies operating in the most mature industries that suffer the greatest. That's because they are heavily dependent upon pricing improvements to grow their profits. By contrast, smaller companies that don't already have huge market shares can often continue to increase their profits by expanding unit sales. Accordingly, many investors sense that small-company stocks may prove more attractive through the remainder of this year than their larger counterparts will he. Large-company stocks could be rescued, though, if overseas economies take off and spur demand for U.S. goods produced and marketed by multinational U.S. companies. For investors, it can all add up to a confusing picture. Tim Medley, president of Medley & Co., a small money-management firm in Jackson, Miss., says investors shouldn't be too quick to stray from their investment course, particularly if they're investing for the long term. "The U.S. stock market is trading at 15 or 16 times earnings," Medley says. "That's not a wild number from a historical standpoint and probably leaves room for a fund manager who wants to own 35 stocks out of the 7,000 or so out there to find them at reasonable prices. "Even if Alan Greenspan raises interest rates today, factories will run, business will go on," Medley says. The really good businesses should do well in a variety of economic conditions. You can miss a lot of opportunities by being too concerned about the big picture."
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