Good for you Bill. Have you ever thought about going on the survivor TV show?
Btw
Check out the S&P food sector!
>Published: March 9 2001 21:18GMT | Last Updated: March 9 2001 21:22GMT
When the Nasdaq Composite Index burst through 5,000 to reach its short-lived peak last March, investors gathered in excited knots by the market's high-tech electronic showcase on New York's Times Square to applaud the phenomenon of the age.
A year on, the exuberance that greeted each new high for the index has been replaced by wariness - and realism. The inverted "V" traced by the Nasdaq over the last two years has come to represent both the promises and the risks of equity investment.
"People are now saying, 'yeah, we probably shouldn't have stayed in as long' - but you never know it's the top until you look back," says Art Bonnel, portfolio manager of the US Global Investors' Bonnel Growth fund, which has seen assets under management shrink from $400m to $160m.
The Nasdaq now trades nearly 60 per cent below its peak of 5,048.62 on March 10 last year. Some stocks, most notably those that represented a pure internet play, have fallen more than 90 per cent.
Investors did not have to be trading individual stocks to lose out: technology mutual funds have fallen by almost the same amount as the Nasdaq, according to Morningstar, the fund analysis company.
In the process, entrepreneurs' hopes of bringing their high-tech companies to market - or financing further expansion - have been dashed, and the overall US economy dented.
The market for initial public offerings, the rocket fuel that helped propel the Nasdaq to its peak, has dried up. In the 10 weeks to March 10 2000, there were 79 IPOs worth $10.9bn, according to Thomson Financial Securities Data. Barely 20 have been completed so far this year, worth just over $3.6bn - and more than half of those proceeds came from the IPO of KPMG's consultancy arm last month.
The Nasdaq's demise contributed to an almost simultaneous collapse of confidence in technology-heavy markets around the world, and undermined other US equity indices such as the S&P500 and Dow Jones Industrial Average, which are still down 17 per cent and 7 per cent from their respective peaks last year. Unlike, say, the 1987 "crash", when the Dow fell 23 per cent in a single day, the collapse of the Nasdaq was spread out over the full 12 months.
One characteristic of its decline has been the eagerness of bulls to cling on to pockets of strength in the technology sector. A year ago, for example, bullish analysts and investors argued that high interest rates, which were already knocking established companies' stocks, would not have an impact on the tech sector because established companies still needed to upgrade their systems.
But demand for personal computers, handsets and telecoms infrastructure has gradually eroded over the last 12 months, undermining companies such as Dell Computer, Cisco Systems and Intel that, far more than the dotcoms, were the pillars of Nasdaq's strong performance.
"They were trading at 80 to 120 times earnings," says Mark Regan, who manages the $5bn MFS Mid Cap Growth Fund. "Let's say they were all growing 35 per cent long term. You can't make money [on those stocks] - your growth rate doesn't support your multiple."
After a year of gloom, however, some strategists have begun to call a turn in the bear market. In the last week, Morgan Stanley Dean Witter, Merrill Lynch and Goldman Sachs have all suggested that investors increase their exposure to US equities.
"Typically the market hasn't responded until three months after the first Fed rate cut. So just because we haven't gotten a response I wouldn't throw your arms up in despair," says Jeffrey Applegate of Lehman Brothers, one of the most bullish of Wall Street's strategists. "I think the decline has mostly occurred, and you have to think, where are we going now?"
But the after-effects of the Nasdaq's rapid rise and sharp decline may linger. On the way up, investors' enthusiasm for any growth stock in effect reduced the effective cost of capital for expanding technology companies to zero. That contributed to overcapacity in the sector and is now leading to corporate failures and profit warnings that have not yet played out. Other sectors have, almost unnoticed, turned in strong performances while technology stocks have declined. Rich Bernstein, chief quantitative strategist at Merrill Lynch, points out that the S&P foods sector has risen 45 per cent in the last 12 months, opening up a 100 percentage point gap with technology.
"I'm watching CNBC [the business TV channel] right now and they're doing a special on dotcom survivors," he says. "Why aren't they talking about Rice Krispies?"
The Nasdaq itself could yet fall further. The index's forward price-earnings ratio of nearly 60 is still almost three times that of the S&P500, and lower-than- normal inflows into equity mutual funds in January and February may be the first sign that chronic underperformance is beginning to deter investors.
Doug Cliggott, of JP Morgan Chase, points out that the average five-year return on the Nasdaq fell to 5 per cent a year after the last meaningful slowdown in technology spending, in 1991: "Let's assume we start the clock at the end of 1997 and grow it at 5 per cent a year. We come up with the Nasdaq at 2000 at the end of 2002. In round numbers, it's essentially where it is now. Given how high valuations are in many of these leading names, that doesn't strike us as unrealistic at all."
Given the euphoria and blanket coverage with which Nasdaq's rise was celebrated, it may be that a sustained decline is the only way to wean US investors from their fixation with the index. As Merrill's Rich Bernstein puts it: "I've never seen so much interest in a sector that is in a bear market in my entire career. |
