Window dressing and the week ahead

NEW YORK (Reuters) – Portfolio managers will be doing some last-minute shopping for winners from the big stock market rally as they take part next week in the quarter-end ritual of window dressing.

The activity could help stocks resume their upward course in the week ahead and keep a long-expected pullback at bay.

The benchmark Standard & Poor’s 500 index (MXP:SPX) is up 11.1 percent so far for the first quarter and the year. That would follow a gain of 11.2 percent for the fourth quarter.

If the trend holds, the S&P 500 will book its best back-to-back quarters since the second and third quarters of 2009.

The S&P 500 lost some ground in the past week, ending down 0.5 percent after five straight weeks of gains, but that’s only its second negative week for the year.

Much of the quarter’s gains have been driven by signs of improvement in the economy, particularly a pickup in jobs, which has been lagging other areas in the recovery.

Window dressing typically involves investors grabbing some of the quarter’s best performers to dress up their portfolio listings.

Some of the last-minute buying is likely to come from the hedge fund community, said Phil Orlando, chief equity strategist and senior portfolio manager for Federal Global Investment Management Corp in New York.

Hedge funds “by and large have not been believers about the improvement in the domestic economy … so they’ve been very much out of the market. Yet here we are with the first quarter looking like the best first quarter since 1998,” he said. “They’ve got a huge gain to catch up.”

But retail investors, he said, have probably also noticed that they’ve missed a lot by having kept their money in Treasuries and other fixed-income assets over the quarter.

“They have woken up to the realization that the surge in yields has resulted in a significant loss of capital for them,” Orlando said.

If the S&P 500 manages to end the first quarter with an 11.1 percent gain, that would be its best quarterly performance since the second quarter of 2009.