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Stocks surge to best quarterly gain since 2009; investors ponder outlook

Traders work on the floor of the New York Stock Exchange.
Traders work on the floor of the New York Stock Exchange.© Brendan Mcdermid / Reuters / REUTERS

Wall Street closed out its strongest quarter in nearly three years Friday, leaving investors wondering if the market can continue to deliver strong gains in the weeks and months ahead.

The first three months of 2012 were stellar for stock investors. The Standard & Poor’s 500-stock index, a popular market benchmark, closed the quarter with a gain of 12 percent. That’s its strongest quarterly performance since the third quarter of 2009 and the market’s best start to any year since 1998.

The leading sector of the past three months is technology, which is up 22 percent over the past three months. The utilities sector, which includes companies that deliver utilities such as gas and power, was the worst performing sector, down 3 percent since the beginning of the year. (Click here to see the stock market’s winners and losers in the first quarter.)

For investors the question is can the market continue to move higher. Jim Paulsen, Wells Capital Management’s chief investment strategist, reckons it can, but he expects to see a market correction at some point in the future, although he notes that the timing is “hard to call.”

Ahead of that possibility, he counsels investors to take some profits and reallocate investments to stocks that have trailed in the market’s rally.

Still, Paulsen expects the market to continue to move higher. Catalysts for the continued advance in stock prices include a strengthening U.S. economy and efforts overseas to stimulate economic growth. As the market moves higher, more investors will enter the market, Paulsen added.

“I sense a feeling that people think they might be missing out a little bit,” he told CNBC Friday. “I think what’s doing that is getting to all time record highs in these markets.”

One caveat for the market’s advance is the rising price of gasoline, Paulsen said.

“If it stays where it is, we will be OK, but if it goes much higher it will be much more problematic,” he said.

Richard Peterson, director of Global Markets Intelligence at S&P Capital IQ, points to one statistic that suggests continued gains in stocks:

Since 1960, there have only been seven occasions when the market has seen back-to-back double-digit quarterly gains, including the past two quarters. The prior six times this happened another quarter of gains ensued on five occasions. The sixth time saw the market hurt by the oil shocks of 1975.

Still, Peterson says investors should be cautious at this point.

The S&P 500 has doubled in value since hitting a recent low of 676.53 on March 9, 2009, so investors should be realistic now, he said, adding that “as long as the Fed keeps interest rates low, investors will continue to ride that train.”

“I think there’s an argument that the Fed has played an important role in the market rally,” Peterson said. Interest rates are at record lows, forcing fixed income investors into equities.

Other investors are very sanguine about the market. Wharton professor and WisdomTree Investments senior advisor Jeremy Siegel said earlier this week that the Dow could see 15,000 or 17,000 by 2013.

With valuations attractively low, Siegel called the current the market “one of the cheapest stock markets I've seen.”

"Dividend-paying stocks, value stocks, the entire market is very attractive," he told CNBC.

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