Stocks End Ugly Quarter With Gains

Updated from 4:03 p.m. EDT

Stocks in the U.S. closed out a downbeat first quarter on a high note Monday, with the major averages rising after investors digested a government plan to rework the nation's financial-regulatory structure.

Following a bumpy morning, the Dow Jones Industrial Average turned higher and went out with a gain of 49.18 points, or 0.4%, at 12,265.58. The S&P 500 was up 7.44 points, or 0.6%, at 1322.66, and the Nasdaq Composite rose 17.92 points, or 0.8%, to 2279.10.

The opening quarter of 2008 has been a decidedly bearish one, and the Dow has given up 7.5% since the beginning of the year. At the same time, the S&P has fallen 9.9%. The Nasdaq took the worst hit, tumbling 14.1%.

March, though, was a modest positive as the Nasdaq tacked on 0.3% for its first monthly gain since October. The Dow was off by a hair for March, and the S&P lost 0.6%, for the blue chips' narrowest monthly losses since December.

The session was partially led by the financial sector, which was attempting to work its way up from sizable losses Friday. The NYSE Financial Sector Index climbed 0.7%, and financial stocks on the Dow mostly performed well. Citigroup (C Quote) had the index's best finish, adding 2.8% for the day, and American Express (AXP Quote) rose 1.3%.

Tech also healed some of its wounds. The Amex Networking Index and the Philadelphia Semiconductor Sector Index ended up 1.1% and 1.3%, respectively, while Dow stocks Intel (INTC Quote), Verizon (VZ Quote) and Microsoft (MSFT Quote) gained 1.7% or more.

"Our view is, we're more or less in a bottoming process here," said Hank Smith, chief investment officer with Haverford Investments. "Fear is leveraged in volatility, and so historically, ramp-ups in volatility like we've seen this year are associated with market bottoms, not market tops." Another interesting development, he added, has been a dearth of insider selling over the past several months.

Still, he believes the likely continuation of negative headlines -- though probably nothing else as bad as the Bear Stearns (BSC Quote) collapse -- will further fuel volatility and prevent the bounce-back from being quick and streamlined.

Breadth was positive. Roughly 4.07 billion shares changed hands on the New York Stock Exchange, and around 1.79 billion traded on the Nasdaq, as winners outran losers 3 to 2.

One of the key stories of the day centered on a proposal by the Treasury Department to give the Federal Reserve more power to fix any financial instability that runs the risk of throwing the market off its rails.

Calling the current oversight system "vulcanized," Treasury Secretary Henry Paulson nonetheless said the revamping shouldn't be implemented until the market has passed through the current thorny period, remarking that immediate changes would only strain things further. He also emphasized that overhauling the system will be difficult and take years to achieve.

Among the proposed changes, Paulson said the Fed would have the power to collect information on capital, liquidity and margins from commercial banks, investment banks, insurance companies and hedge funds in order to detect problems at the "root level," rather than focusing on the "tree level" as he said the government currently does.

Additionally, the plan would join the Securities and Exchange Commission and the Commodity Futures Trading Commission, while the Office of Thrift Supervision would fall under the nation's bank regulator, the Comptroller of the Currency. All federal bank charters would be merged into one larger charter, federal bank regulators would be consolidated, and a federal-level commission would be created to regulate mortgages.

"This plan is really just the initial go at it," Smith said. "Nothing is going to be finalized for probably a year or two. This is ultimately a political event, so you have the current administration's first salvo, but now you're going to have the Democrats' voice in as well, and typically they have been more pro-regulation. So who knows where we'll ultimately settle?"

In recent months, the Fed has become increasingly involved in trying to sort out the U.S. credit crisis through a variety of means, including a series of rate cuts, easing its rules for discount-window lending and most recently helping to steer the arrangement by JPMorgan Chase (JPM Quote) to acquire Bear Stearns.

Traders were also dealing with a better-than-expected report on the health of the factory sector. The Chicago purchasing managers' index, a measure of manufacturing in the Midwest, improved to 48.2 in March. The index's break-even point is 50, so that still indicates contraction, but February showed a reading of 44.5. Economists were looking for 46.

"This is a small but pleasant surprise," said Ian Shepherdson, chief U.S. economist with High Frequency Economics, noting that he had expected the strike at American Axle (AXL Quote) -- which has forced General Motors (GM Quote) to idle several of its plants -- to keep the index lower. "Manufacturing is soft but not in recession, thanks to exports," he said.

As for equities, Schering-Plough (SGP Quote) sank 26% after a group of cardiologists said doctors should limit prescriptions of the cholesterol drugs Vytorin and Zetia marketed by the company and Merck (MRK Quote). Shares of Merck lost 15.4%.

Both Lehman Brothers and Cowen & Co. cut Schering to neutral-equivalent ratings, and Merck also had its price target lowered at Lehman.

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