When war stirs a slumbering market

The stock market struggled to wake from its stupor in 2003's first quarter, but ultimately jitters over war and the economy proved too much, and most mutual funds again drifted off into negative territory.

The Dow Jones Industrial Average lost 4.2 percent and the S&P 500 Index gave up 3.6 percent. Fund-watcher firm Lipper Inc. said US diversified-equity funds marched in lock step, shedding 3.3 percent in the period ending March 31. The Nasdaq 100 Index rose slightly.

"It was basically a sideways to slightly down quarter," says Don Cassidy, a senior Lipper analyst.

After three straight years of negative returns on funds, experts and investors alike were rooting for better news. Still, Mr. Cassidy says, there were some signs of encouragement in that funds were not down by much either in the first quarter or the fourth quarter of 2002.

"It was [another] quarter in which people can feel a little better," with negative returns that were only in the single digits, he says. "It was a minus sign, but things didn't collapse."

Most analysts now are closely tuned to war developments, awaiting signs of a final resolution to the conflict to better gauge the market's next move.

In the first quarter there was surely enough bad news to discourage the market. The uncertainty of war - once launched, how would it go? - teamed up with a still-middling economy and budget-deficit worries to present formidable hurdles to corporate America and the companies and people that invest in it.

The result: 38 of 43 types of equity funds charted by Lipper posted negative results.

The worst performance of any sector was turned in by gold funds, which were off about 12 percent for the quarter. Christine Benz, a funds analyst at Morningstar Inc., said that over the past three years precious-metals funds have risen an average of 18.7 percent annually, so a breather in this sector, which often follows political events could be understandable.

Other notable laggards included a number of foreign-sector funds - Europe, Japan, and the like. Telecommunications and financial-services funds also lost more than 5 percent each.

But in the diversified-fund arena, Ms. Benz says she was a bit surprised to see that growth funds didn't fare as badly as did value funds.

"Value funds usually hold [up] well in this environment," where the economy is marking time, she says. Not this time: Large-cap growth funds, for instance, lost 1.1 percent, while their value-oriented counterparts lost 5.1 percent.

The contrast was starker in multi-cap funds, where the growth side lost 0.7 percent even as value funds in that group retreated 4.7 percent.

There's no dark secret behind this departure from the norm, says Cassidy. It just so happened that a number of big growth companies performed well between January and April. They included Johnson & Johnson, Intel, and eBay, which ran up in price 26 percent during the period.

Those companies also are classified as pharmaceutical or tech stocks, and funds in those sectors likewise turned in credible overall performances.

Health and biotech funds actually rose 1.2 percent, says Lipper, while science and technology ceded only 0.3 percent during the quarter.

In fact, Benz says, both those sectors were doing well, and had performed especially smartly during the week of March 17, when the Dow rose 6 percent as the uncertainty of war in Iraq turned to reality.

In our last quarterly report on funds Jan. 13, Bryan Piskorowski, a market commentator with Prudential Securities, said that the market tends to rally when military action commences.

That proved quite true this time, as all major indexes rose strongly during the week of March 17, and pulled stocks and funds along with them.

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