Robust quarter is best in more than a year

A down final week couldn't stop stocks from posting their best quarter in more than a year, led by the continued — albeit slowing — real-estate boom and revived interest in telecommunications issues.

Among major indexes, the Dow Jones Industrials and Standard & Poor's 500 each gained 3.7 percent in the first three months of the year, in both cases their best performance since the fourth quarter of 2004.

The technology-heavy Nasdaq composite index gained 6.1 percent, also its best outcome since the end of 2004, and an indicator of the strength of technology and telecom stocks in the quarter.

The Nasdaq, which includes many small-capitalization stocks, also benefited from the outperformance of that sector in the quarter. The Russell 2000, for example, gained 12.6 percent, compared with 4 percent for the Russell 1000.

Telecom, said Richard Helm of Cohen & Steers' Seattle office, "was a very beaten-down sector, and at the end of the day they're still fighting the cable business tooth and nail. There was some snapback [in the quarter], but whether there's momentum to keep it moving, I don't know."

The quarter's best-performing Northwest stock was a small biotechnology company: Portland-based AVI BioPharma, whose stock price more than doubled. (Granted, that's easier to do when you start from $3.45, as AVI did.) All the gain occurred in January, after AVI reported some of its experimental compounds seemed effective against bird flu.

With small-caps and techs leading the way, and with investors willing to drive up a stock based on preliminary research, you might think the markets were in the early stages of a bull run instead of three years in.

Throughout the quarter, in fact, investors showed more resilience in the face of bad news, and more willingness to buy into earlier-stage and speculative companies, than they had in a long time.

That also translated into an uptick in initial public offerings. Fifty-five companies sold stock on U.S. exchanges for the first time in the first quarter — typically the slowest period for IPOs — compared with 46 in the same period last year.

Only one Northwest company was among them: NightHawk Radiology Services of Coeur d'Alene, Idaho. Since NightHawk went public in February, its share price is up 49.3 percent.

Construction companies and real-estate investment trusts gained from the nation's love affair with real estate, and energy stocks were buoyed by high oil prices that showed little sign of dropping.

In general, stocks in industries that wax and wane with the macroeconomic cycle did well in the quarter, said Scott Anderson, senior economist with Wells Fargo Economics in Minneapolis. That's because their bottom lines tend to fatten more than most during an economic expansion, he said, and at long last investors seem willing to grant that the U.S. economy is really growing.

But, Anderson said, "I'm a little concerned about how long that can last in the face of the expected slowdown."

Higher interest rates should slow the economy later this year, he said, and lead to higher bond yields, which will compete with stocks for investors' cash.

"I think a lot of the best gains for the year have probably occurred," he said.

But not everyone agrees that assessment.

"We're not in a high-rate environment," Helm said. "We're in a higher-rate environment than we used to be. Rates were at such an abnormally low level for so long that when they did start to rise, there was probably naturally some sell-off."

Once the markets perceive that, and assuming inflation stays under control, he said, "then I think you've set yourself up for a nice investment environment for the rest of the year."

Bob Toomey, chief equity strategist for Seattle's E.K. Riley Advisors, said the Federal Reserve's policy of repeated, small-step rate increases have given the markets a confidence about what to expect.

"The Fed has been very transparent about what it's trying to do," he said.

With luck, he said, corporate earnings could grow by double digits in 2006, and the S&P 500 could rise nearly as much — say, 8 to 10 percent.

"Barring unforeseen issues like terrorist attacks or a dramatic spike in oil prices, we think the market will continue to work its way upward," he said. "As long as the Fed doesn't do something crazy, and inflation remains moderate, investors will be all right."

Drew DeSilver: 206-464-3145