New Wall Street Outlook Hurting High-Tech Stocks
The stock market got what it wanted Tuesday: another drop in interest rates as the Federal Reserve cut its key bank lending rate to 5.5% from 6%.
But Wall Street’s reaction couldn’t even qualify as polite applause. The Dow Jones industrial average inched up just 10.89 points to 2,887.87, and the NASDAQ composite index of mostly small stocks continued its Monday selloff, falling 3.02 points to 484.72--the lowest close since April 1.
For months, the stock market has figured that no matter how bad the economy might get, the Fed would be able to fix it quickly with lower rates.
Over the past two weeks, however, many investors have reconsidered that “quick-fix” idea. Now, some folks are figuring the recession won’t end until sometime this fall, rather than by June. And if that’s the case--and corporate profits face two more quarters of decline--what’s the incentive for holding stocks?
Those mental gymnastics have pushed many stocks down sharply since mid-April. And nowhere has the damage been more severe than among small stocks and particularly high-tech issues that had rocketed higher early in the year.
Monday, at the opening of the annual Hambrecht & Quist high-tech stock conference in San Francisco, concern about the still-sinking economy was on the minds of most of the money managers who came to hear presentations by 125 tech companies.
Yet Dorcas Casey, a veteran tech investor with the firm of Thorson, Brown & Plunkett in Greenwich, Conn., said she was surprised that more of her peers at the H&Q; conference weren’t asking tech company managers that simplest of questions--”How’s business now ?”
Maybe they weren’t asking because they were afraid of the answer. Case in point: After SynOptics Communications, a leading provider of computer-networking systems, volunteered to its H&Q; audience that near-term earnings have suddenly become tough to forecast--after a stellar past 12 months--the stock plunged $4.25 to $40.
William Rankin, senior vice president with L.A.-based CMB Investment Counselors and a professed bear on the stock market now, said he came to the H&Q; conference for one reason: “To see if peoples’ expectations would be fulfilled.” Knowing that investors have bid up tech stocks on the belief that sales of computers and other tech equipment would somehow stay strong even as the world economy slowed, Rankin wanted to hear it from the horses’ mouths.
After one day at the conference, Rankin concluded that “the news, at the margin, is a little worse than expected.” For a bear, he may have been understating things. Disk-drive maker Quantum Corp., admitting that orders from customer Apple Computer peaked in the quarter ended March 31, forecast that revenue would decline in the current quarter. Quantum also noted an “overall softness” in the personal computer market. Investors heard that and clubbed the stock Tuesday, sending it down $3.625 to $19.875.
So where does the stock market go from here? Probably into an even deeper state of confusion. Even as Wall Street continued to punish many tech stocks Tuesday, buyers flocked to such stocks as General Motors (up $1.75 to $35.75) and 3M Co. (up $1.625 to $89.125). If you’re figuring the economy still is in big trouble, you have to be pretty brave to be buying industrial stocks like GM and 3M--especially on the same day that the government reports that orders for factory goods tumbled 2.8% in March, the fifth straight decline.
Obviously, the people on both sides of those GM transactions can’t be right. Maybe the buyers are just long-term investors, in the truest sense of the word. Maybe all of this new pessimism about the economy signals that we’re really at the bottom, and there’s nowhere to go except up.
But we won’t know for sure for many weeks or perhaps even months. And in the meantime, the accompanying chart sums up what most investors are wrestling with. The chart shows that, despite stocks’ recent selloff, most key market indexes ended April just about where they started. It’s as if April never happened. The hefty gains that stocks racked up in February and March are still there, for the most part--but they’re on paper.
That means many investors still have an opportunity to take their profits and run if they figure the recession isn’t close to being over. And considering that the best paper gains are in technology growth stocks and many other small stocks that led the market higher early this year, it doesn’t take a Rhodes scholar to figure which stocks are most vulnerable to profit taking.
APRIL WAS A DUD FOR STOCKS Most broad stock market indexes finished April where they started, as the rally faltered after mid-month. The question now: Do you take your year-to-date gains and run?
Percent change Tues. Year Index close April to date Dow transports 1,142.81 +3.0% +25.6% NASDAQ composite 484.72 +0.5% +29.7% Amex market value 360.76 +0.4% +17.1% Wilshire 5,000 3,587.92 +0.1% +15.7% S&P; 500 375.34 nil +13.7% NYSE composite 205.37 nil +13.8% Dow industrials 2,887.87 -0.1% +9.7% Dow utilities 210.01 -3.3% +0.1% H&Q; growth-tech 915.42 -4.6% +42.7%
