Stock market limps to end of another strong quarter

2 up-quarters in a row a first since early 2000

uncertainties hover


NEW YORK - Despite stumbling yesterday, the stock market posted its first back-to-back quarterly gains since its tumble began in early 2000, reflecting improving corporate earnings and strengthening global markets.

Although stocks lost ground for the day and the month, the Dow Jones industrial average climbed 3.2 percent during the third quarter, adding to a 12 percent increase in the second quarter. The Standard & Poor's 500-stock index, which rose nearly 15 percent in the second quarter, gained 2.2 percent in the third. The Nasdaq composite index gained 10 percent in the quarter after posting a 21 percent increase in the previous one.

Led by information technology stocks, the gains put the market on track to make 2003 a positive year, which would end three consecutive years of declines. So far this year, the S&P 500 is up 13.2 percent, the Dow is up 11.2 percent and the Nasdaq has gained 33.8 percent. Analysts said they doubted that the fourth quarter would wipe out those gains.

In addition to stronger corporate earnings, analysts attributed the upswing to encouraging economic data, such as growth in capital spending and continued consumer spending, both of which may have been helped by tax cuts.

Furthermore, most European markets edged up, and Asian markets have had robust returns this quarter. For example, the Nikkei index of 225 stocks rallied 13 percent in Japan. In addition, Japan reported last month that its economy was experiencing an "incipient recovery" driven by capital spending.

All of this bodes well for companies when they begin to roll out quarterly earnings reports.

"No matter how you slice it, we're in for some good earnings news here in the third-quarter reporting season, and I think it will continue into the fourth quarter," said Charles L. Hill, the research director for Thomson First Call, which compiles analysts' profit estimates and other figures. "My warning is that we are in a gradual recovery, more gradual than many people think."

Indeed, the market has most recently been drifting downward. All three major market gauges finished lower for September, reversing six consecutive months of gains for the S&P 500 and the Dow and a seven-month run by the Nasdaq.

In trading yesterday, stocks dropped sharply, responding to a poor profit forecast from Sun Microsystems and some weak economic data.

The National Association of Purchasing Managers said that manufacturing in the Midwest expanded less than expected in September and that the region's manufacturing plants had shed jobs. In addition, consumer confidence dropped to its lowest level since March, falling to 76.8 last month from a revised 81.7 in August, fanning fears of a retreat in the consumer spending that has sustained the economy.

Many people remain on the market's sidelines, and analysts say these potential investors are trying to ascertain how much momentum is behind the economy's rebound or how healthy corporate profits truly are.

For one thing, analysts said, the projections made by executives over the last quarter have varied more than during the previous quarter, and there is still a lingering question in the minds of many people of whether companies can be trusted at all.

Some analysts also noted lingering worries about the war in Iraq, while others said that last week's announcement of a cut in production by OPEC may be weighing on the market as investors fear the international economic consequences of a rise in oil prices.

"All these items lead to uncertainty, and uncertainty is not good for investors," said Howard Silverblatt, an analyst at Standard & Poor's.

"I think corporate governance is the most significant item," he added. "We expect to get a solid answer. We expect to get a truthful and valid assessment of the situation. If you don't believe in something, you can't invest in it."

Comparing the third quarter with the period a year earlier, when markets were reeling over the summer's spate of corporate scandals - the S&P 500 is up 22.2 percent, which represents the index's best year-over-year return since the third quarter of 1999. The Dow, which had finished that quarter at a four-year low, has also increased 22.2 percent; the Nasdaq, which stood at a six-year low, has risen 52.5 percent.

Of the 10 industry sectors in the S&P 500, information technology led the rally in the third quarter, increasing 10.8 percent. The materials sector, which produces paper, metals and chemicals, rose 5.6 percent, making it the next best-performing sector. That rise suggests investor optimism about homebuilding and capital spending, some analysts said.

Telecommunications services, meanwhile, was the worst performing sector in the S&P 500, losing 10 percent of its value and led by declines in Qwest Communications and Verizon. Health care and utilities also put in negative performances.

Analysts said that the activity in the markets for Treasury notes and bonds, although volatile, also suggested that investors expect the economy to continue to improve.

Treasury notes and bonds rallied yesterday, pushing down yields. The rate on the benchmark 10-year note fell to 3.95 percent from 4.08 percent, while its price, which moves in the opposite direction, rose 1 6/32, to 102 17/32. The yield on the 30-year bond fell to 4.89 percent from 5.01 percent.

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