For investors watching the market from the sidelines over the past few months, this may be the time you've been waiting for. It's widely anticipated that equity markets will rise this week as fund managers partake in the end-of-quarter ritual of window dressing.
A stellar first quarter
It's not an overstatement to say that the market has performed well thus far in 2012.
If the trend holds, the S&P 500 will end the first quarter up by more than 11%. It'll be the best first-quarter performance of the decade. And it'll assume that mantle by an order of two. Last year's runner-up came in at 5.5%. While the index lost ground last week, ending down 0.5% after five weeks of gains, it's only the second negative week of the year.
The advance has been broad-based, with all market sectors up for the year.
The technology sector is up by 16.8%. It won't come as a surprise to many investors that one of the sector's best performers was Apple (Nasdaq: AAPL ) . The big news last year was that the iPhone maker's market capitalization surpassed ExxonMobil's. Suffice it to say, that's now history. Apple's current $550 billion market cap dwarfs the oil giant's $400 billion.
The financial sector is up a similarly impressive 15.6%. After being beaten down during the financial crisis, it appears that many of the country's largest banks are making a comeback. Bank of America (NYSE: BAC ) is the top-performing stock in the sector, recording a staggering 77% increase year to date. Last week, shares in the nation's second largest bank by assets even traded in double digits for the first time since last summer. And shares in Citigroup (NYSE: C ) , the third largest bank by assets, recorded a similarly respectable 41% increase.
It seems reasonable to conclude that the quarter's gains have been driven by signs of improvement in the economy. This is particularly true on the unemployment front. Since the recession's peak in 2009, the civilian unemployment rate has come down by nearly 2 percentage points. It now stands at a comparatively modest, though still painful, 8.3%.
Although the end of a calendar quarter may pass by the typical investor with little notice, it isn't a similarly innocuous event for hedge funds and mutual funds. For better or for worse, at the end of each quarter, fund managers are typically required to disclose the contents of their portfolios. And to highlight their gains and disguise losses, they partake in what's known as window dressing.
Window dressing is how fund managers gussy up their portfolios to appease investors. It typically occurs just before the record data for a fund to publish its holdings. A manager whose performance is lagging exchanges underperforming stocks for ones that are widely recognized and coveted hoping that curious shareholders will see a portfolio that looks better than the results it has delivered.
Like fashionable curtains and shades, stocks that are ripe for window dressing share a number of characteristics. First, they're typically highly recognizable companies. Second, they're large enough to offer significant liquidity. And third, they need to have performed well over the requisite time period -- in this case, the first three months of 2012.
With this in mind, it's relatively easy to come up with some of the most likely contenders. The previously mentioned Bank of America and Apple probably fit this bill the best. Both are massive, well-known companies that have performed at the top of their industries since the beginning of the year. It's also easy to see how Microsoft (Nasdaq: MSFT ) might catch fund managers' eyes. It's up 24% year to date and sports a $270 billion market cap. And JPMorgan Chase (NYSE: JPM ) is also likely at the top of the list. It's a well-known bank that's up nearly 37% for the year and is now the nation's largest bank by assets.
Foolish bottom line
Although the above stocks have undoubtedly caught the eye of mutual and hedge fund managers for the reasons discussed, to discover the one stock that's drawn the attention of The Motley Fool's chief investment officer, check out our free report "The Motley Fool's Top Stock for 2012." To get your copy while it's still available, click here now -- it's free.