Bulls to keep strutting, for now
Wall Street's first quarter was stellar, and the second could start off strong. After that, it gets tougher.
By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - New month. New quarter. New stock advance?

Stock investors just wrapped up the best first-quarter in years, with the S&P 500 adding 3.8 percent. It hasn't chalked up a better first-quarter performance since 1999, when it added 4.9 percent.

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And the Dow and Nasdaq did nicely in the quarter as well, rising 3.6 percent and 6 percent, respectively.

Although many analysts and other soothsayers are concerned about the stock market later in the year, in the short term, there are plenty of reasons to be optimistic that the bulls can keep going.

"I'm pleased with the first-quarter gains, but I don't think that you can extrapolate that the whole year will be positive as a result," said Ram Kolluri, chief investment officer at Global Value Investors. "We still expect low single-digit returns for the S&P 500 this year."

However, he said that early April could continue to be bullish, due to seasonal and technical factors.

Stocks are also likely to continue benefiting in the short term from an increase of money coming into the market, said Paul H. Levine, president at Lifetime Financial Services.

"Even though the Federal Reserve has been raising interest rates, they are also increasing the money supply," Levine said. "You also have a lot of money that was going into real estate going into stocks now, since the housing bubble is bursting."

These factors probably have been supporting stocks so far in 2006, and are likely to continue to help in early April, Levine said. The start of a month and the start of a quarter also tend to be positive, as investors put money into 401(k) retirement plans and other investments.

April is the typically the Dow's best month of the year, according to the Stock Trader's Almanac, good for gains of around 1.8 percent on average, since 1950.

For the S&P, it's only the fourth best month of the year, the Almanac says, while for the Nasdaq, it falls in the middle of the 12 months.

Economy, earnings and bonds

The week ahead is chock full of relevant economic reports, including March reads on auto and truck sales, manufacturing, and sales at chain stores. The highlight of the week is likely the March employment report, due Friday.

Forecasts suggest the week's economic reports should suggest the not-too-hot, not-too-cold economic environment that investors crave, with economic growth strong, but not overly inflationary.

Anticipation about strong first-quarter earnings -- which start pouring in earnest about mid April -- should also provide a lift for the markets, the analysts said.

Earnings are expected to grow 11.3 percent in the first quarter, versus a year ago, according to earnings tracker Thomson Financial/First Call. Should earnings grow at least 10 percent, it would mark the 11th straight quarter of double-digit earnings growth for the S&P 500.

"The earnings growth is a positive," said Kolluri. "The problem is that the ten-year note yield is currently standing at 4.85 percent and is pushing toward 5 percent and our friends at the Fed are not telling us when rate hikes are done."

Last week, the benchmark 10-year note surged to a 22-month high amid bets that interest rates are set to rise.

"Concerns about these factors are dampening any excitement about earnings," Kolluri added.

Oil prices at $67 a barrel and rising again are also going to cause problems going forward, Levine said. In addition, gold and copper prices have surged in the last week, suggesting some investors are rushing to the so-called safer havens of hard assets amid worries about higher inflation.

The fed factor

Last week, the Federal Reserve Board boosted the Fed funds rate, a key short-term interest rate, by a quarter-percentage point to 4.75 percent. It was the 15th consecutive rate hike since the central bank began its rate-hiking campaign in June of 2004.

In the widely-tracked statement, the bankers hinted that more rate hikes are on the way, and that they would continue to scour the upcoming economic reports for signs of inflation. Investors will be doing the same.

So while the overall trend may still be up, on a day-to-day level, reports that hint at inflation could rattle stock markets.

This is particularly the case since the major gauges are hovering near multi-year highs. Last week, the Nasdaq hit its highest levels since February 2001. Meanwhile the Dow and the S&P 500 have been flirting with more than 4-year highs.

The trend remains positive, but there are a lot of issues for the stock market to get through before the major gauges can try to make new highs, said Art Hogan, chief market analyst at Jefferies & Co.

"We've got a lot of economic news between now and the next Fed meeting in May," Hogan said. "The path of least resistance is higher, but there's a bumpy road." Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.