The market weathered additional debt downgrades and intensified solvency questions for embattled automaker General Motors, continued weakness in newspaper and traditional media stocks, such as New York Times and Time Warner, and even weakness in online search-engine Google, whose meteoric rise had previously been cited as the proximate cause of traditional media’s recent swoon. Additionally, weakness in the newspaper industry encoura
ged McClatchy to purchase Knight Ridder. Media conglomerates and radio were among the worst performing industries, continuing their multiyear slide.
New Federal Reserve Chairman Ben Bernanke will have to guide a slowdown in residential housing delicately, taking care not to send prices down precipitously as he manages inflation. The Fed’s rate-raising campaign had its effect on bonds, with the Lehman Brothers Aggregate Index shedding 0.65% for the quarter.
Surveying the Sectors
Telecommunications stocks led the way for the first quarter, with a 14.6% surge. Latin American service providers did well, making up for continued poor performance among European service providers. Additionally, distressed business-service providers, such as Time Warner Telecom, rebounded. The telecom sector, however, is the second-worst for the trailing five years, with negative 4% annual returns.
The developing world’s torrid growth helped industrial materials stocks as well. Cement companies such as Lafarge and steel companies such as Mittal rose sharply. Global development has helped this sector post 24% annual returns for the trailing three years, placing it second behind energy.
Energy companies, for their part, continued their multiyear run, with drillers such as Schlumberger and Weatherford International tacking on gains of over 25%. The sector has risen 34% annually for the trailing three years and 14.5% for the trailing five years, leading all sectors.
Financials also surged, with Brazilian banks such as Banco Bradesco SA leading the way. U.S. investment banks such as Goldman Sachs also did well, as mergers, “going privates,” and other corporate maneuvers occurred.
Industry Performance
Steel and iron led the way with a whopping 42% gain, as increased global development drove commodity prices up. Optical equipment makers, meanwhile, posted a 33% gain for the quarter. Ciena, maker of advanced transmission and switching systems for fiber-optic communication networks, surged 75%, and JDS Uniphase powered up 77%. Increased business spending on communications infrastructure, including spending by telephone companies seeking to provide broadband, helped the industry.
Online retail suffered, dropping 13%, as eBay, Expedia, and Amazon showed weakness. The themes here were varied. For example, eBay’s 2006 outlook disappointed Wall Street, additional growth led to compressed margins for Amazon, and Expedia’s unanticipated capital expenditures to fend off increasing competition gave investors the jitters.
Media conglomerates continued to suffer, with the advertising environment unclear due to the popularity of the Internet and the uncertainty of the economic climate. Radio was the worst performing industry, dropping 14% for the quarter, just as it did in the last quarter of 2005. Radio content provider Westwood One shed 32% after reporting poor fourth-quarter results.
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This article first appeared on http://indexes.morningstar.com.
