Equity Funds Notch Gains After Wrestling With Slump; Small-cap value rose 6.1% to lead domestic funds higher during first quarter.(SERIES: MUTUAL FUND QUARTERLY)(IBD SPECIAL REPORT)

Byline: KEN HOOVER

The stock market. for the first time in a year, stumbled slightly in the first quarter of 2004. But U.S. stock mutual funds managed a small gain despite what looks like the first correction of a new bull market.

The sell-off began in earnest Jan. 28 when the Fed left interest rates unchanged at a four-decade low, but tweaked its policy statement to pave the way for future increases. Nothing spooks stock investors like the prospect of rising interest rates.

Add to that a terrorist attack in Madrid on March 11, rising oil prices and softening consumer confidence, and you have a recipe for a correction.

For the quarter, the average U.S. diversified stock fund rose 2.98%, according to preliminary Lipper Inc. figures. Small-cap value did the best, rising 6.13%. Specialty stock funds, which include bear funds, limped in with 0.93% and large-cap growth funds with 1.07%. Value did better than growth.

The Dow Jones industrials fell 0.92%, the S&P 500 rose 1.28%%, the Nasdaq dropped 0.45% and the Small-Cap S&P 600 rose 6%%.

For March, the correction was in full swing. The average diversified U.S. stock fund lost 2.51%. The Dow was down 2.13%, the S&P 500 lost 1.63%, the Nasdaq dropped 1.75% and the S&P 600 rose 1.23%.