Historic Second Quarter Start Sparks Hope of a Recovery

By Jennifer Yousfi
Managing Editor

The U.S. markets leaped into the second quarter with the strongest start since 1938, as a rally in financial stocks led all three major indices to post gains of more than 3% on the first trading day in April.

It was a marked contrast to the first trading day of the first quarter when the Dow Jones Industrial Average Index suffered its weakest first trading day (in percentage terms) in the past 25 years and never looked back. 

For the first quarter:

Compare those dismal stats to the first three trading days of April as of yesterday's close:

  • The Dow has posted a gain of 363.14 points (3.0%), to close at 12,626.03.
  • The Nasdaq has increased 84.20 points (3.7%), to reach 2,363.30.
  • And the S&P 500 has gained 46.61 points (3.5%), to hit 1,369.31.

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According to Yale Hirsch's The Stock Trader's Almanac, on average since 1950, April has been the best performing month of the year for the Dow with an average gain of 1.8% for the month.

If April continues the way it has thus far, 2008 should prove no exception to that rule.

The first quarter of the year will likely be remembered for the U.S. Federal Reserve's emergency bailout through JPMorgan Chase & Co. (JPM) of the fifth-largest domestic investment bank, The Bear Stearns Cos. Inc. (BSC), but the quarter was host to a bevy of negative news among financials as Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER) posted record losses and suffered through the worst quarters in their illustrious histories. 

In Lehman's Terms

More recently, Lehman Brothers Holdings Inc. (LEH) has fought off speculation that it would be the next to falter and remained alive and kicking at quarter-end. 

Thus far in the second quarter, the financial sector has been playing a different tune. The sector is up over 5% for the month versus its near-12% decline in the first quarter.

Shares of Lehman Brothers are up over 17% after the firm announced it would offer $4 billion in convertible preferred stock. Investor response to Lehman's offering has been overwhelmingly positive. Lehman stock has gained $5.68 in April to close at $43.32 yesterday (Thursday).

"It's three times oversubscribed; people are interested in investing in Lehman," Art Hogan, chief market strategist at Jefferies & Co., told MarketWatch.

Meanwhile, UBS AG (UBS) also announced it would try to raise additional capital and despite estimating a $19 billion first quarter loss, U.S.-listed and European-listed shares rose on the news that Chairman Marcel Ospel would step down. Shares have gained $3.69 in the first three days of the new quarter to close at $32.49 yesterday.

"To the extent the market is comfortable that they're able to add to their capital base, it means we are working our way through these problems," Alan Gayle, senior investment strategist at RidgeWorth Capital Management Inc., which oversees about $74 billion in Richmond, Virginia, told Bloomberg News. "There's hope we're seeing the end of the write-offs."

In early January, a WSJ.com poll showed that 42% of economists surveyed felt that the dreaded "R" word was inevitable. As the dire first quarter progressed, that number had jumped to over 70% by March, with many of those same economists now believing the country was already stuck in the midst of recession. 

By true definition, a recession is marked by two straight quarters of negative growth.  That means it's quite possible that a recession can only be identified after the economy is working its way to the other "R" word - recovery.

In the fourth quarter of 2007, gross domestic product eked out a feeble 0.6% gain, far lower than the 4.9% growth rate experienced in the third quarter, but still ever-so-slightly positive. So while a textbook definition recession may have not reared its ugly head quite yet, many of those same "experts" anticipate first and second quarter GDP data to reflect flat growth or an economic contraction. 

But on an optimistic note (for a change), Ned Davis Research indicated that over the last 10 recessions, equity prices have soared on average 24% within just six months of hitting their lows. 

That means if we did hit "the" bottom in the first quarter, investors could be seeing some nice gains by the start of the fourth quarter.

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