Updated: 24-Oct-00
Tech Stocks Won't Shine in Q4
[BRIEFING.COM - Robert V. Green] It hasn't been a great year for tech stocks. But, lately, we have heard many pundits stating that Q4 will show a rebound in tech stocks. Here is an argument for why it isn't likely.
Conventional Thinking
The conventional thinking is that Q4 will bring a rebound for tech stocks. But it is largely based on the fact that Q4 has been a good quarter in recent years. Four of the past five years have been positive. In particular 1998 and 1999 had great Q4s.
Q4 95 Q4 96 Q4 97 Q4 98 Q4 99
Nasdaq 1.0 5.2 -7.0 29.5 70.0
S&P500 5.3 7.7 2.5 20.9 14.0
(Note: the Nasdaq is the best index for overall tech stock representation, although not all Nasdaq stocks are technology companies.)
The Key Difference
The problem with this currently conventional line of thinking is that this year is very different from previous years.
The Nasdaq returns in 1999 were simply excessive.
While the Nasdaq has provided higher returns over time, they haven't been as far over the S&P500's return as they have been over the past year.
The returns of 1999 in the Nasdaq were unprecedented. The divergence from the overall marketplace returns is so strong, it makes the previous years look like tech stocks and the overall market were virtually identical.
It almost looks like the Nasdaq is struggling to return to market norms. But the one-year chart disguises the excess Nasdaq return that occurred prior to the one year period. There is still excess return of more than 100% in the Nasdaq, according to the five year chart.
To fully compensate for the excess returns of last year, a swing back to the norm means further declines for the Nasdaq.
Conclusions
Technology is already one-third of the S&P500 index. What the extreme divergence means is that the technology stocks are supposedly going to grow far more than ordinary companies. While it is reasonable for technology stocks to have higher returns, the incredible results of 1999 now look just plain unreasonable.
In fact, from a big picture perspective, it seems as if the year 2000 has all been focused on driving out the excesses of technology stocks.
For the foreseeable future, a return to the mean of the overall market is far more likely than a continued divergence from it, and that means lower returns in the Nasdaq for Q4 than for the overall market.
This is probably true regardless of what the overall market does. If the S&P 500 declines from here, the Nasdaq will have greater declines. If the S&P500 rises, the Nasdaq will rise less.
That isn't your usual concept of "beta," but, for the Nasdaq, it is the likely path, at least through Q4.
Comments can be emailed to the author, Robert V. Green, at rvgreen@briefing.com.
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