us stocks have best third qtr since 1997 with feds

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U.S. Stocks Have Best Third Quarter Since 1997 With Fed's Help

By Nick Baker

Sept. 25 (Bloomberg) -- U.S. stocks headed for their best third quarter since 1997 as falling commodity prices and an end to rising interest rates led investors back to computer-related companies. Slowing economic growth may end the rally.

Oracle Corp., the world's third-largest maker of software, and Cisco Systems Inc., the world's biggest maker of computer- networking equipment, led an advance that started in mid-August. Stocks rose as government reports suggested the Federal Reserve would stop lifting rates after two years and avert a recession.

``After it became clear the Fed rate increases were going to be stopped, investors began reaching for risk,'' said Lawrence Creatura, who helps manage $2.5 billion at Clover Capital Management Inc. in Rochester, New York. ``The problem is, the next year may not be too promising.''

Food, health-care and telephone companies also climbed during the quarter as evidence of an economic slump, including the end of a five-year boom in housing, drove some investors to favor the industries that may hold up best.

Energy and raw-material producers were among the worst performers in the quarter as commodities fell, suggesting the economy may suffer from sagging consumer and industrial demand.

The Standard & Poor's 500 Index has risen 3.5 percent since the beginning of July even with a 0.4 percent drop last week, to 1314.78. The third-quarter gain will be the biggest in nine years as long as the S&P 500 stays above 1310.16.

The Dow Jones Industrial Average fell 0.5 percent last week, trimming its rally for the quarter to 3.2 percent. The Nasdaq Composite Index retreated 0.8 percent for the week, and is now 2.2 percent higher since the start of July.

Canada, Latin America

Canada's S&P/TSX Composite Index slipped 0.3 percent for the quarter. Declines among energy and raw-material producers, which together account for almost half of the S&P/TSX's value, held back the index. Telephone and technology companies had the biggest gains.

In Latin America, Colombia's IGBC General Index and Peru's Lima General Stock Index did best by surging 25 percent in dollar terms. They had the third- and fourth-biggest gains among 80 stock benchmarks worldwide tracked by Bloomberg.

The region bounced back in the third quarter as a halt to the Fed's rate increases reversed a flight from riskier shares in May and June.

Central bankers left their target rate for overnight bank loans unchanged on Aug. 8 at 5.25 percent, breaking a string of 17 consecutive quarter-point increases. They held steady again last week after Labor Department reports showed wholesale and consumer prices were tame.

Getting `Reassurance'

August's reports showed inflation was on the wane. A gauge of wholesale prices unexpectedly fell and consumer prices rose at the slowest pace since February.

Declining prices for oil and other commodities brightened the outlook. Crude tumbled 23 percent in New York from a record on July 14 and headed for the biggest quarterly loss since 1998. The Reuters/Jefferies CRB Futures Price Index of 19 commodities was set for its steepest quarterly loss ever, 13 percent.

``The first half of the quarter was about `Gee, maybe the housing market boom won't go on forever.' People got defensive,'' said Charles de Vaulx, who oversees about $35 billion at First Eagle Funds in New York. ``The second half is when we saw the price of oil start to move down significantly. There was reassurance that the Fed was done.''

De Vaulx has purchased shares of Intel Corp., the world's biggest producer of computer chips, and Microsoft Corp., the world's largest software maker, in recent months.

Industry Reversal

The S&P 500 technology index jumped 9.3 percent since Aug. 15, when the first of the inflation reports came out. The gain was the biggest among the benchmark's 10 industry groups.

For the quarter, the group climbed 6.1 percent for the third- largest advance. The stocks were the worst performers during the first half of 2006.

Oracle, which last week reported more first-quarter profit than analysts forecast, rose 15 percent since mid-August and 21 percent during the quarter. The Redwood City, California-based company led the Russell Top 50 Index, a gauge of the 50 U.S. companies with the highest market value, in both periods.

Cisco, based in San Jose, California, was the second-best performer since Aug. 14 with a 14 percent gain. For the quarter, the stock climbed 17 percent, the fifth-biggest advance.

Technology shares rallied as ``fears about sharply higher inflation and recession were diminished,'' said Ed Keon, chief market strategist for Prudential Equity Group LLC in New York.

`Fears Diminished'

The U.S. economy expanded at a 2.9 percent annual pace in the second quarter, more than the Commerce Department's initial reading of 2.5 percent. Two weeks ago, Fed Bank of St. Louis President William Poole called the economy ``robust.''

``Interest rates seem to be OK, energy is OK, the consumer is OK,'' said Cummins Catherwood, who helps manage $750 million at Walnut Asset Management LLC in Philadelphia. ``The fundamental stuff is OK, so people like me who have been in a whole lot of cash for a long time are beginning to find values'' in stocks.

When September began, Catherwood had about 25 percent of his assets in cash. That's down to 6 percent to 10 percent now, he said.

The advance in computer-related stocks failed to displace food, drug and household-products companies, leaders during the quarter's first half, as the best performers since July began.

`Going Nowhere'

Health-care stocks in the S&P 500 climbed 8.9 percent, the second-biggest quarterly advance among the 10 industry groups. Pfizer Inc., the world's biggest drugmaker, surged 20 percent for the Russell Top 50's second-largest gain.

Energy stocks, the biggest winners in 2006's first half, had the quarter's biggest losses. Their S&P 500 index tumbled 6.2 percent, only the third quarterly drop since 2002. Valero Energy Corp., the largest U.S. oil refiner, slipped 28 percent for the third-steepest decline in the S&P 500.

Raw-material companies in the benchmark fell 2.7 percent as a group. Alcoa Inc., the world's largest aluminum producer, had a 15 percent decline, the second-most in the Dow average.

``The economy is already sliding into recession,'' said James Stratton, based in Plymouth Meeting, Pennsylvania, whose $636 million Stratton Small-Cap Value Fund has gained 17 percent annually in the past five years.

``Defensive groups will rise, but their increase will be offset by the decline in cyclical groups,'' Stratton said. ``The net effect will look like a market going nowhere.''

To contact the reporter on this story: Nick Baker in New York at [email protected] .

Last Updated: September 24, 2006 19:56 EDT