Bear market perspective, from smartmoney
<<It's officially a bear market for the Nasdaq. Time to get out of tech stocks. Run for cover. The good times are over. We'll never see Nasdaq 5000 again. Bear market. Bear market. Bear market.
STOP! Please take a deep breath. There you go. Now read on. The last few weeks have been some of the strangest the market has seen in a long time. We're getting all worked up about very minor details. I don't mean to minimize how ugly the market has been, but investors need a collective slap in the face, like the one Cher gave Nicolas Cage in 'Moonstruck': 'Snap out of it!'
Yes, it has been painful, especially for investors who placed heavy bets on tech stocks. But I'm tired of opening the paper every morning and seeing a variation of the same picture: the harried trader, holding both hands to his head with a look of deep sorrow on his face. Is he about to cry? It's as if a beloved family pet just got run over or something. Spare me, please.
This bear market for the Nasdaq is relatively tame. I know, I know. We've already seen a more than 25% drop - and the scary thing, of course, is that there's no way to predict just how much worse it may get. And we've had several days of really big drops that make things appear really bleak. But I don't believe for one minute all the stuff about how this could be a truly prolonged and nightmarish bear market because investors who have never lived through a real downturn may panic.
Nonsense. Such thinking is just another example of the strange selective amnesia that overcomes many investors and members of the financial press. We get so caught up in short-term events and our incredibly myopic view of the markets that we forget even quite recent history.
Let's get something straight here, once and for all. This 'bear market' has nothing on the one that we saw less than two years ago. Remember the summer of 1998? Wasn't that a bear market?
In case you've forgotten, look at the chart on this page and click on the 1998 period. An ugly sight, isn't it? The three major indexes all heading south at an alarming pace. Scary. Truly scary. Everything was mercilessly sold off. Didn't matter if your stocks were small cap or large, value or growth, tech or nontech. (Back then the media really didn't bother classifying things as 'Old' or 'New' Economy. Forgive me this quick rant about my pet linguistic peeve, but these hideous terms appeared together in only 99 stories in 1998. So far this year, there have already been 4,153 references! Agghhhhhh!)
Now click on the 2000 timeline. Hmmm. What do we see here? The Nasdaq is down sharply, but the Dow is up 12% and the S&P has gained 5%. Wow. Maybe if people had, I don't know, done something smart like diversifying the holdings in their portfolio, they wouldn't need to be so concerned with the second-by-second gyrations of the Nasdaq.
As we all know, the market wound up bouncing back at the end of 1998 thanks to three rate cuts by the Fed, and stocks enjoyed a great run last year. That's why the latest gloom-and-doom has me confused. If you look at what's troubling the market now and what had it spooked back in 1998, isn't it clear that the events of 1998 were far far far more worrisome than the current bear market in the Nasdaq?
1998: Russia defaults on its debt. The economies of several Asian and Latin American countries appear to be on the verge of collapse. A huge hedge fund implodes after its complex bets on interest rates go seriously awry. That implosion forces several large money-center banks and brokerage firms to take gigantic writedowns, and there are rumors that a large Wall Street firm is on the verge of collapse. The talk is of deflation, a global recession that will put an end to the U.S. economic expansion - and is even a threat to the world financial system. And oh yeah, just in case all that isn't enough, there's the hullabaloo about a popular U.S. president's getting impeached.
2000: A respected Wall Street strategist advises investors to shift a little money out of tech stocks. A U.S. District Court judge declares Microsoft (MSFT) a monopoly. Any conceivable penalty is probably years away - and the most punitive outcome, a breakup of the company, would arguably be good both for competition and for Microsoft investors. One analyst trims his revenue estimate for Microsoft by 3.4%, citing slower PC growth. But this lower number still represents 25% growth over last year!
I don't get it.
We act as if it's the first time this has ever happened to quality tech stocks, and as if this necessarily means they'll never ever ever get back to their former highs again. That's just foolish. Again, look at the summer of 1998. During that bear market, Microsoft fell 22%, Qualcomm (QCOM) plunged 31%, Cisco Systems (CSCO) lost 32% and America Online (AOL) dropped 37%! They all came back - and then some.
Another reason the summer of 1998 was truly horrifying: When the Nasdaq hit its low point of 1419.12 on Oct. 8, it was 18.5% below where it had been trading a year earlier and at its lowest level since June 12, 1997! More than 16 months of gains were erased. By contrast, the Nasdaq's close of 3676.78 on Thursday was its lowest since only Dec. 15 1999, and still left the index 42% higher than this time last year. Not exactly time to bury your face in a Kleenex just yet.
What's the message? If you're investing for the next couple of years and not the next nanosecond, then avoid the urge to panic. There's nothing wrong with taking some money off the table. But if you don't need the money now (and if you do, what was it doing in the stock market?), if you are investing for the long term, don't get out of the market entirely. You'd probably regret that.
I think we need to see legitimate signs of a major economic slowdown, evidence that the Fed is failing to engineer a soft landing and may in fact trigger a recession, before it is time to sound the death knell for the stock market or even for tech stocks. I'd need to see a big drop-off in consumer spending, a gigantic deterioration in consumer confidence, a big uptick in layoffs and a rise in the unemployment rate before I got scared. The economy is still too solid for me to think that a big slowdown in corporate earnings growth is on the way.
I'm not trying to be a Pollyanna here. I realize how bad the market has been, and how badly some investors have been hurt. And it is impossible to predict when the carnage will end. I have the benefit of looking at a finite period and comparing what is going on now to that time. Will it get worse in the short term? It's very possible, even if there is a short-term rally.
Another thing to remember about 1998: The market fell violently in a short period of time, recovered briefly, and then fell to new lows before finally pulling out of the bear market. The Nasdaq dropped 25.6% from July 20 to Aug. 31, bounced back 17.4% by Sept. 23 and then fell another 19.4% by Oct. 8. So that end-of-summer rally proved to be the proverbial dead-cat bounce. I'm not even going to try to predict when the battered feline might get up and saunter away this time around.
If anything there's still the potential for more downside in the short term. Margin calls appear to have intensified the selling in the last few weeks, and there's definitely more froth in the market now than there was back in 1998. You could argue that the market's rebound in the fall of 1998 was the start of the truly ridiculous speculative mania. Theglobe.com (TGLO) going public and popping more than 600% on its first day? Companies like SkyMall (SKYM) and Books-A-Million (BAMM) soaring on the mere announcement of e-commerce strategies?
For the last year and a half we've been inundated with one hot can't-miss revolutionary tech trend after another. And when the shelf life of one Web fad was about to expire, there was Wall Street with a fresh new supply of stocks in the next craze. We went from Web communities to e-commerce to online brokers to Internet infrastructure to B2B to Linux. There was always the Next Big Thing to latch onto.
And now it seems investors have finally tired of this game, punishing a lot of these stocks that never deserved such lofty valuations. This is good. I can only hope that once the market does recover, investors won't again fall victim to the hype and prop up third- and fourth-tier tech companies that have no hope of making any money. The Internet - and technology as a whole - is no different than any other sector. There will be a handful of companies that dominate the landscape, market leaders that have strong pricing power and will be able to continually post solid gains in revenue and profits.
That said, this sell-off has provided a wonderful opportunity for those quality technology companies - the Suns (SUNW) and the Dells (DELL) and Oracles (ORCL). It's not time to abandon them because of this sell-off. Quite the contrary. Again, just remember 1998. Anyone who held on to a Cisco or Qualcomm back then (a time when the future for stocks appeared to be much bleaker than now) was rewarded. Since July 1998, Cisco is up almost 300% and Qualcomm nearly 1,500%. And the Nasdaq is up 95%. I'm not saying that we're going to have some miraculous immediate market bounce-back, but over time the tech leaders that have been dumped in the last few weeks will be higher. Mark my words.
If you're holding good stocks that have been pummeled by nothing more than this momentary shift in sentiment, then sit back and try to relax. We were in a bear market not that long ago, and we lived through it. We'll live through this one, too.>>
By Paul R. La Monica |
