RB, <<Is the reason why the Nasdaq has held up better than the Dow and S&P merely on account of speculation or is there something more fundamental going on here?>>
something of both i would say. first of all, the ultimate fundamental in stock market valuation is emotion. rationalizations put forth by analysts (not needed in bull markets, not wanted in bear markets) as to why stock XYZ should trade at such-and-such a level merely serve to pass the time. imo they have no utility at all.
let us look at an example from a stock market mania of the past, RCA in '29. it was the hi-tech darling of its time. one could actually argue that its peak valuation in '29 was in a sense not entirely irrational. after all, apart from a brief dip in the early years of the depression (30-32), its business continued to grow by leaps and bounds for decades to come. and yet, after the top was in it proceeded to lose 97% of its value and only regained its old high sometime in the late fifties. simply put at its peak in '29 the stock market priced in decades of growth in a single euphoric moment.
the same holds probably true for many of todays tech stocks. as i have mentioned on another occasion, there was an interesting comment made by an analyst on CNBC regarding Cisco as its market cap passed the 500 bn mark. to those of us who are a wee bit incredulous at a a big cap trading at 40 times revenues, he had this to say: "as long as Cisco continues to deliver 50% annual sales growth, no price is too high for the stock".
really? CSCO is about as close to a one-decision stock as one can find. it and a handful of other behemoths remind me very much of the 'nifty fifty' of the early seventies. the arguments put forth back then to justify the valuations were essentially the same. and yet, as the bear market hit, the nifty fifty lost between 70-90% of their value. some regained their old highs 12, some 15 years later, some never saw their early 70's peak again. funny enough though, during the time when their stock prices were in precipitous decline, both their revenues and earnings continued to grow apace. so in one sense the analysts had been right: the nifties great fundamentals in terms of growth continued.
unfortunately for their shareholders, the stocks just didn't seem to care, for more than a decade.
my conclusion is that todays market darlings will ultimately suffer a similar fate...fundamentally, the birth of the new economy is a momentous event, and strong growth is probably a given for a long time to come (interrupted by the occasional recession). but one day the stocks will put in a top that won't be seen again for a long time regardless.
regards,
hb |
