Is there a bright side to the stock market's lousy performance in the first quarter?
Sure: If you're in the buying phase of your stock-investing career, falling prices are good. The less you pay, the bigger your profit -- assuming prices go up by the time you want to sell.
Of course, any time prices stall, as they did in the first three months of this year, you wonder whether they will rebound, and when.
From Dec. 31 through March 31, the Dow Jones industrial average and Standard & Poor's 500 each lost 2.6 percent, while the Nasdaq Composite fell 8.1 percent.
Some factors influencing stocks have changed in the past three months. The war in Iraq and terrorism are probably smaller issues now than they were last year. And concerns about the outcome of the presidential election are obviously not an issue this year.
Today, the big issues are soaring oil prices, increasing inflation threats and rising interest rates. Surveys suggest most experts expect all three factors to worsen through the year. (Energy stocks were the only group within the S&P 500 to do exceptionally well in the first quarter, gaining more than 17 percent.)
These factors boost companies' costs, so many experts worry that gains in corporate profits will slow down.
In fact, they've already slowed: Profits for the first quarter are expected to be about 8 percent higher than in the same quarter last year. That compares to a 27 percent increase in the first quarter or 2004 compared to the 2003 quarter. Of course, the 2003 quarter was exceptionally weak.
But there are some positive signs for investors: Standard & Poor's said last week it expects the S&P 500 index to gain nearly 14 percent over the next 12 months.
Among the factors influencing that forecast: Stocks in the index are trading at a fairly reasonable price of just under 20 times corporate earnings for the past 12 months, compared to the excessive prices of 46.5 times earnings at the end of 2001. The lower the number, the less risky stocks are, and the better the prospects for future gains.
Also, more companies are raising their dividends, or starting to pay them if they haven't before. Companies don't do that when they feel they must hoard cash against a rainy day.
Of the 500 companies in the index, 110 increased dividends in the first quarter and six initiated dividend payments. The figures were 88 and two in the first quarter of 2004, S&P said.
Dividends became more attractive to investors under the 2003 law that cut dividend taxes to 15 percent. Previously, dividends were taxed as income at rates more than twice that high for many investors.
Indeed, dividend-paying stocks have fared relatively well this year, with first-quarter losses of just 0.04 percent compared to losses of 8.07 percent for nondividend-payers, S&P reported.
More and more investors appear to be catching on: Healthy dividend payments are a key factor in getting good long-term returns.
Will stocks rebound this year? No one knows for sure. But if you're a long-term investor, there's not much alternative to stocks right now. You don't want to buy bonds when interest rates are rising because their values will fall as issuers offer new bonds that are more generous. Cash kept in bank accounts and money market funds is safe, but it won't earn much these days, even though interest rates have gone up a tad.
Stocks could well give you a wild ride this year. But if you're investing for the next five, 10 or 20 years, they're probably still the best bet.