It was a bad, bad quarter
A mini-rally in the Dow Jones Industrial Average was cut short on Wednesday, but the stock market certainly enjoyed a good run on Tuesday when the Conference Board's consumer confidence index came out stronger-than-expected. But poor earnings were back at the forefront by mid-week, dogging equity investors as they have all quarter.

When all was said and done this week, the Nasdaq composite index turned out its fourth consecutive quarterly decline, its first since 1984. The quarterly path for the rest of the stock market doesn't look so good either. The chart below shows how the various market indices fared in the first quarter of 2001. The performances have generally been downhill since January. The Russell 2000, a measure of small capitalization stocks, has performed the best this quarter, down only 6.9 percent from year end. The Dow is next with an 8.5 percent drop since year end. Third place is the S&P 500, with a 12.2 percent drop. The Wilshire 5000 is down 12.6 percent from year end. The big loser, to no one's surprise, is the Nasdaq composite index, which is down a whopping 25.6 percent from yearend. The up and down bouncing over the past month is telling some analysts that the worst is over and the market is only trying to find a bottom. Others are less optimistic.

For the most part, investors are resigned to the fact that corporate earnings will probably not improve until the second half of the year. Equity investors go back and forth between looking for stronger economic data (which promise better corporate profits) and hoping for sufficiently weak data to induce greater Fed easing (so that companies can benefit from lower interest costs and presumably better economic growth in the future).

Long-term investors must realize that bear markets are a blessing in disguise. After all, that's when all the buying opportunities are found. It is easier to buy low (and sell high) when you're able to buy at rock bottom prices. But risk factors seem magnified at this time of the business cycle. Notice, we said that risk appears greater right now. Actually, the risk is the same whether you are buying in a bear or a bull market. Those investors new to the equity markets in the 1990s - who never saw a bear - are just now experiencing the sour half of the phrase "risk and reward."

Yield curve shift
It was a wild week in the bond market as investors shifted in and out of the stock market. While equities rejoiced that consumer confidence turned up in March, it was a downer in the bond market since it raised fear that the Fed won't ease rates quite so aggressively the next couple of months. Some bond pundits suggested that the bond market was trying to "remove" the expectation of an inter-meeting rate cut. Indeed, if you look across the maturity spectrum, you'll note that most Treasury yields are higher this week. Despite the upward trend in Treasury yields, the yield on the 2-year note did drop five basis points this week. Incidentally, the two-year note is often a leading indicator of expectations for Fed policy. Indeed, if you look at the chart below, you'll see that the yield on the 30-year bond has trended lower but is still not all that different from a year ago. In contrast, the yield on the 2-year note has fallen sharply the past year with significant movement in the past month as well.

Tuesday was the worst day in the bond market as the improved consumer confidence figures shook the confidence of traders that the Fed would ease in April, before its May policy meeting. Friday was probably the best day of the week for bond investors as the Chicago purchasing managers' index plunged sharply, renewing confidence as it were that manufacturing was indeed in recession. Perhaps the Fed will show their hand in April after all?