Stocks ended the quarter on a high note Monday, with a rally led by financials, but it wasn't enough to offset losses earlier in the year. The S&P logged its worst quarter in nearly five years, leaving traders looking to the second quarter for signs of hope.
All three major indexes rallied Monday but it wasn't enough to offset recent losses. The Dow Jones Industrial Average finished flat for the month of March as gains racked up from the Bear Stearns and Federal Reserve news fizzled by month's end. For the quarter, the Dow shed about 7.6 percent.
The S&P 500 index finished down 0.6 percent for the month, and 9.9 percent for the quarter, the worst decline since the second quarter of 2003. The Nasdaq finished up 0.3 percent for the month, the first positive month since October, but heftier declines in the prior two months left the tech-heavy index down 14 percent for the quarter.
Analysts now expect earnings for S&P 500 companies will be down 8.1 percentfor the quarter, according to data compiled by Reuters. That's a far cry from the 4.7 percent growth expected at the beginning of the quarter and the 5.5 percent decline projected as recently as last week.
Some positive momentum has accumulated in March, putting the market on heightened alert for a bottom and looking toward the outlook for the second quarter. So far, there have been 242 negative outlooks from S&P 500 companies and just 169 positive forecasts, pointing to a drop of 1.8 percent in S&P 500 earnings during the second quarter.
Earnings for financial companies are expected to have dropped 49 percent during the quarter, and forecasts point to another 30 percent drop in the second quarter.
Technology and financial stocks, the biggest decliners among 10 key S&P sector indexes, both shed about 15 percent during the first quarter.
For the final trading day of the quarter, however, those sectors were among the top gainers.
"As the financials go, the market goes. The financials are leading us higher," Matt Cheslock, a senior specialist at Cohen Specialists, told CNBC of the day's trading activity. "We’re seeing commodities sell off pretty aggressively and I think that’s a rotation of money that’s going from commodities back into financials and trying to pick a bottom."
Crude oil for May delivery fell more than $3 to close at $101.58 a barrel.
It looks like the market is "kind of encouraged" by the government's plan to overhaul of financial regulations, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, explaining the pop in financials.
Some traders shrugged at the announcement, saying it would be a long time before changes would take effect and who knows what they would be.
But the overhaul "is maybe creating an environment where investments in some of these banks and brokerages will be less risky than they have in the past," Ablin said, adding, "whether it's the Paulson plan or another plan, the fact that this new regulation is on the table to me means something is going to happen."
The Treasury plan gives the Federal Reserve sweeping new powers in what will likely be the biggest overhaul of financial regulation since the Great Depression. The government suggests that the plan might have been able to prevent the kind of crisis that is currently ripping through the financial markets as it calls for stricter requirements for disclosure.
Also giving a boost to stocks was a better-than-expected gain in the Chicago purchasing managers' index, a gauge of Midwest manufacturing activity. The Chicago PMI rose to 48.2 in Marchfrom 44.5 in February. Economists had expected a reading of 46.7.
This is the last regional report ahead of the national reading on manufacturing from the Institute for Supply Management, due out on Tuesday. Economists expect the indicator to slip to 47.5 from 48.3.
Among other big indicators this week is the March jobs report, due out before the bell on Friday. The consensus is for nonfarm payrolls to have dropped by 60,000, following a 63,000 decline in February, and for the unemployment rate to tick up to 5 percent from 4.8 percent.
Citigroup, the top gainer on the Dow, advanced 2.8 percent after the company announced plans to split its consumer banking unitfrom its credit-card business.
JPMorgan, which has taken a beating in recent weeks over its plans to purchase Bear Stearns, rose 0.6 percent.
Bucking the financial trend, shares of Lehman Brothers, which have been hammered amid rumors that the brokerage will be the next domino to fall, slipped after the said it's suing Japanese trading house Marubeni to recover $352 million lost in an alleged financial scam.
There were some concerns that Swiss bank UBS , the European bank hardest hit by the subprime crisis, may report additional write-downs this week following a weekend announcement that it has already begun to lower the value of some structured securities.
"It strikes me that the big securities firms are just in a dramatically different business than are the commercial banks," Donald Straszheim, vice chairman of Roth Capital Partners, told CNBC. He suggests that "investors should be more focused overseas -– that’s where the growth is going to be, not in the U.S."
Overseas, markets have taken an even worse beating, making valuations attractive. Chinese stocks are off a whopping 32 percent since the start of the year, India has fallen 19 percent and Japan and Hong Kong are off more than 16 percent, according to a report in today's Wall Street Journal. In Europe, the German market has shed nearly 19 percent and French stocks are off more than 16 percent.
Equity capital continued to flow out of the U.S. for a seventh straight week, according to a report from UBS, but the pace slowed from the previous week. A net $820 million left the U.S. last week, compared with $2.2 billion a week a earlier.
Merck tumbled about 15 percent, its worst day since the 2004 recall of Vioxx, after an expert panel said the company's joint cholesterol drug with Schering Plough, Vytorin, showed no signs of working betterthan a cheaper generic statin.
There is some concern now that Schering Plough, which is heavily dependent on Vytorin revenue, may not be able to survive as a separate entity. Its shares plunged 26 percent.
The development came as AstraZeneca halted tests on its own cholesterol drug, Crestor, but for the opposite reason -- clinical tests had shown the drug far superior to a placebo in treating patients. Its shares climbed 4 percent.
The news gave a boost to shares of rivalsAbbott and Pfizer , which have big cholesterol franchises.
Shares of Google were on track for their biggest quarterly decline since the stock debuted in August 2004. The stock ended at $440.47, down 36 percent from the beginning of the year.
Elsewhere in tech, American depositary shares of Research In Motion, one of the top three decliners on the Nasdaq 100, fell 2.7 percent after the Competition Bureau ruled that the National Hockey League didn't violate any anti-competitive laws in its handling of RIM co-chief Jim Balsillie's failed attempt to buy the Nashville Predators hockey club last year. The Canadian company and maker of the popular BlackBerry e-mail gadget, is set to report earnings after the closing bell Wednesday. Analysts expect earnings of 74 cents a share, though the company projects a more robust 80 to 82 cents a share.
U.S. spirits maker Fortune Brands said on Monday it would begin repurchasing its own shares after losing out in an auction for Absolut vodka maker Vin & Sprit to French rival Pernod Ricard.
Shares of IAC/InterActiveCorp jumped after a court last week ruled in favor of the company in a dispute with a key shareholder. The ruling paves the way for the company to be split into five separate companies.
Philip Morris slipped nearly 1 percent to finish at $50.58 on its first day of trading since being spun off from Altria , whose shares skidded 2.5 percent.
-- Reuters contributed to this article.
MONDAY: End of first quarter
TUESDAY: Auto sales; ISM manufacturing index; construction spending
WEDNESDAY: MBA applications; factory orders; oil inventories; Bernanke testifies; Earnings from Monsanto, Best Buy, Research In Motion
THURSDAY:Jobless claims; ISM services index; Fed's Yellen speaks
FRIDAY: Jobs report
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