>Mercury News
When the history books are written, investors may discover that while they oohed and aahed at first over the wonder of the technology bull market of 2000, they were, in fact, experiencing a true financial mania.
The rise that seemed so dazzling only nine months ago turned into an equally dramatic decline, turning the year 2000 into the worst year ever for the Nasdaq composite index. Even the expected December rally fizzled. On Friday, the Nasdaq composite index sank 87.24 points to close at 2470.52, down 39 percent for the year.
And though the plunge isn't yet quite as deep from its highest point, nor as protracted as the one in 1973 and 1974, the decline in wealth involved is far greater. ``What we really had was a technology mania that surfaced in 1999 and continued through the first quarter of 2000,'' says Larry Wachtel, market analyst at Prudential Securities.
The other markets performed dismally for most of the year too. The Dow Jones industrial average, largely dominated by Old Economy companies, suffered its first loss in a decade, losing 6.2 percent of its value over the year. The broadest gauge of the overall market, the Standard & Poor's 500, shed 10.1 percent.
Still, Nasdaq took center stage this year, soaring relentlessly through the spring to its peak 5,048.62 and then falling 49 percent in just nine months.
``Mania'' may sound too strong, but some argue that this kind of run-up and fall has all the hallmarks of previous speculative excesses such as the Dutch tulip bulb mania of the 1600s, the New York Stock Exchange during the Roaring 'Twenties, and Japan's Nikkei stocks during the 1980s.
``I like the word `frenzy,' '' says Stuart Freeman, chief equity strategist A.G. Edwards & Sons.
``It was a bizarre kind of period to say the least,'' says David Blitzer, chief investment strategist at Standard & Poor's.
The tech rise and fall has many of the characteristics of a mania: broad participation of many new investors, valuations that go to excessive extremes, persistent rises in an index with fewer and shallower corrections.
During the Roaring Twenties, shares in a glamorous New Economy darling called Radio Corp. of America (RCA) shot up to $114 per share by conservative accounts -- by some accounts the price soared above $500 -- and then sank to $2.50 after crash of 1929.
This year, one mark of excess was that a tech company could go public without a penny in reported revenue or earnings. For instance, Corvis Corp., a fiber optics firm, went public last July without any revenues and losses of $118 million. Its stock sold for $84.72 a share in the first day of trading. When reality hit, the stock plummeted. It closed Friday at $23.81.
Just remember the increase in some of the hottest companies. Yahoo Corp., for instance, soared to a stock price 500 times its earnings per share. Its stock closed Friday at $30.63 per share -- down 86 percent for the year.
The bear market clawed other big names in the Valley. Apple Computer Inc. lost nearly three quarters of its value and closed Friday at $14.88 per share. Hewlett-Packard Co. lost 29 percent of its value over the year and closed at $31.56.
It remains to be seen whether tech stocks prove resilient next year. Typically, investors avoid mania-affected companies for years, according to A.G. Edwards's Freeman. Quality companies entrenched in their industries won't go away. However, usually, many companies caught up in manias evaporate, succumbing to bankruptcy in some cases, mergers in others. The coolness of snubbed investors can last for years.
``It can easily take three to eight years before you get that kind of enthusiasm again in some of those companies,'' Freeman says.
Instead, if it was only a sharp sell-off and not the end of a mania, Nasdaq might recover strongly as it did after its severe drop in 1973 and 1974. For the next two years, the index climbed at more than 20 percent a year and didn't experience another down year until 1981.
Of course, in 1974, the market fell during an oil embargo, rising inflation and a prolonged recession, whereas this year, it fell because rising interest rates and a slowing economy pricked unrealistic valuations.
And Nasdaq's slide may not yet be over. Market-watchers disagree on whether Nasdaq has hit bottom or will sink lower.
Some say Nasdaq might already be in recovery, along with the rest of the market. Anirvan Banerji, an economist and director of research at the Economic Cycle Research Institute, reasons that financial markets anticipated the economic slowdown and sold off accordingly. With inflation tame and the Federal Reserve signaling possible interest rate cuts, the stock market may already be turning around.
Others disagree. Ed Yardeni, economist at Deutsche Bank Securities said he thinks the Nasdaq could sink to 2,200 by March. Thomas McManus, equity portfolio strategist for Banc of America Securities, predicts it will drop even lower, breaking through 2,000.
After all, some tech companies are still richly priced by historical standards. The stock of Cisco Systems Inc., for instance, is trading at a price that's 50 times higher than what it expects to earn in profit per share next year. That's much higher than the historical norms.
``I think it will be several years before it breaks back through 5000,'' says McManus. ``It's quite possible that even when the earnings prospects for these companies rebound, we might never see the same euphoric valuations.''
Even the optimistic, such as David Hilal, director of technology research at Friedman, Billings, Ramsey & Co. Inc., have modest forecasts. Hilal says Nasdaq will creep along in the mid-2000s. Then, led by wireless and software companies that service other corporations, will climb as high as 3,500 by the end of 2001. That's still well below Nasdaq's peak last March 10.
Everything's going down next year, not just tech, insists Steve Hochberg, co-editor of the Elliott Wave Financial Forecast newsletter. Hochberg subscribes to a somewhat quirky ``Elliott Wave'' theory that holds that financial markets follow group psychology, which form recognizable patterns. A huge positive wave that started in 1932 is now ending, he argues. Don't be fooled by a kneejerk stock market rally early next year, he warns: ``We're morphing from bull to bear.''
The forecast is sunnier outside tech. The overall market has flirted with bearishness but hasn't fallen nearly as sharply as the Nasdaq.
The Wilshire 5000, which measures nearly all of the nation's stock value, officially entered bear territory on Dec. 20, when it dropped to 11,570.28. That's a 22 percent drop from its peak on March 24. It has since crept up somewhat but no one can say whether that upward crawl will continue.
Elsewhere some of the nation's estimated 9,000 stocks are shining. PepsiCo. is trading at historic highs and closed Friday at $49.56 per share. Philip Morris Companies Inc. has doubled its value this year, closing Friday at $44 per share. Extraordinary gains in some sectors made up for tech's losses, argues McManus. According to his calculations, stocks for financial companies are up an average of 35 percent for the year, healthcare stocks up an average of 63 percent and power utilities -- PG&E crisis notwithstanding -- up an average of 44 percent.
The health of non-tech sectors leads many investment strategists to conclude that the U.S. bull market is just ``maturing'' and will continue into 2001.
``It's 20 years old now, it's not a teenager,'' says Tracy Eichler investment strategist at PaineWebber. ``We're entering a new phase in this bull market with more normalized returns but increased volatility.'' |
