Why Tech Won’t Follow Grandpa’s Bear Market Rules
Now playing at the Short Attention Span Film and Video Festival: “A History of Recent Nasdaq Bear Markets.”
What had all the makings of a market meltdown last Tuesday became a major non-event, when the Nasdaq composite index recovered from a stunning 13.6% morning plunge to finish the day off just 1.8%.
And there, apparently, came and went the latest Nasdaq bear market. At the low on Tuesday the index, dominated by the country’s biggest technology shares, was off nearly 28% from its record closing high of 5,048.62 reached on March 10.
Historically, bear markets have commonly been defined as declines of more than 20% in key indexes such as Nasdaq or the Dow Jones industrials from their peak levels. And they used to take many months to play out, often more than a year.
By the middle of the trading session Tuesday, Nasdaq was in a bear market. By the close, with the index down about 18% from its March 10 peak, it was out of bear territory. Elapsed time of bear market: 17 days.
By the end of the week none of that mattered at all to many technology stock bulls who held on tight through the Microsoft-led 7.6% Nasdaq slide on Monday and through Tuesday’s dramatic swing. Buyers returned to the tech sector in droves on Wednesday, Thursday and Friday, lifting Nasdaq to 4,446.45 by Friday’s close. The week’s net loss: a mere 2.8%.
Is that the end of it? Many market chart watchers still believe more profit-taking in technology issues is likely in coming weeks and months. But they’ve already been wrong in their assessment of how any rebound would begin.
Most veteran analysts dutifully warned after Tuesday’s swoon that the tech sector would have a hard time clawing its way back, and that the most speculative tech issues would almost certainly face additional selling pressure.
But by Thursday it was the most speculative tech names that were in greatest demand once again. Case in point: Internet infrastructure builder Juniper Networks, which even at its low of $187 on Tuesday was priced at 718 times estimated 2001 earnings per share (that’s 2001, not 2000), by Friday had resurged to $269.
The Amex biotech stock index, which by Tuesday’s close had fallen 40% from its March 6 record high, regained 15% by Friday.
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Still, many “momentum” investors who came late to the tech-stock boom this year are probably wishing they had sold at least a few shares several weeks ago. Myriad Genetics, one of the biotech names caught up in the frenzy for human-genome-mapping companies in the first quarter, jumped from $45.89 at Tuesday’s close to $67.50 by Friday. But this was a $232 stock in early March.
Emulex Corp., an already profitable company whose chips speed data transmission on computer networks, rose from $83.94 at Tuesday’s close to $112.56 by Friday. But it’s still half the price it was at its March peak.
Analysts who take a still-bearish view of tech stocks argue that many investors who are under water based on the prices they paid in late February or early March will be eager to bail out as soon as another downturn begins.
But the fast comeback of many stocks late last week suggests there were plenty of new buyers waiting in the wings.
What’s more, for as vicious as the declines have been in many “new-economy” stocks over the last month--and for as many investors as there were who had bought stocks with borrowed money (i.e., on “margin”) and were forced into selling last Monday and Tuesday--it’s surprising there haven’t been more highly visible casualties.
As of Friday, only one major investment firm--Bulldog Capital Management in Clearwater, Fla.--had come forward to admit that one of its heavily margined funds had been virtually obliterated by the market’s swings last week.
Among mutual fund companies, most last week were insisting that the record flood of money in February and early March into their most aggressive stock funds had not reversed significantly.
But then, that’s the nature of these nouveau Nasdaq bear markets: They’re over so quickly that those who might be tempted to sell often find that by the time they’re ready to push the button prices are coming up again.
Likewise, these rapid-fire bear markets are extremely frustrating for bargain hunters, who find that true bargain prices don’t last long.
Before the 1990s, bear markets were much more drawn-out affairs. As measured by the Dow Jones industrial average, the median length of bear market declines from 1900 through 1990 was 363 days, according to market data firm Ned Davis Research.
By contrast, all of the Nasdaq index’s major declines since 1990 have run their course in 68 days or less.
That doesn’t mean that every stock that went down in those declines came back quickly, or came back at all, for that matter. But there was enough buying in enough Nasdaq issues (meaning, of course, in tech stocks) to get the composite index rebounding in a relative hurry.
There are some good reasons market pullbacks have been so short in duration during the last decade. On a fundamental basis, the U.S. economy has been growing for the entire period--something the market, in its wisdom, has almost certainly understood and factored in.
The economy’s success, and the market’s gains, have in turn created massive wealth since 1990. Even when investors lose a chunk of money on paper, for many it may not feel like more than a scratch, given what’s happened to their portfolios and their home’s value in the last decade.
(For the true speculators, even heavy losses may not long deter them from trying to get back into the game--any more than most people who lose in Las Vegas end up swearing it off forever.)
What’s more, information obviously moves much faster than ever before. When trouble hits (such as the Russian debt default in late-summer 1998) that means every investor has an opportunity to panic out at the same moment. And when it’s clear the world isn’t ending, every investor has an opportunity to panic back in at the same moment.
Perhaps most important with regard to technology stocks, the sector is simply so huge today, with so many facets (semiconductors, software, Internet, telecom, biotech, etc.) there is always something exciting going on somewhere--some reason for both long-term investors and short-term speculators to believe they can make a killing.
Does all of this mean there will never again be a sustained bear market in U.S. stocks in general, and Nasdaq issues in particular? I wouldn’t make that bet. Show me a deep economic recession somewhere in the near future, and I’ll show you the potential for a brutal stock market slide, made worse by the extraordinarily high price-to-earnings valuations on tech shares large and small.
But until that recession arrives, “buying the dips” is likely to remain a great American investor pastime, and the excitement over technology overall is unlikely to fade drastically. If you can live with the guaranteed volatility--and avoid excessive greed--you can still make money here.
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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com
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Blink and You Miss Them: Nasdaq’s Recent Sell-Offs
Remember when bear markets took many months, even years, to play out? No? Well, there’s a good reason you may not: Significant declines in major stock indexes, especially the Nasdaq composite, have tended to occur with lightning speed in the last decade. The major declines in the Nasdaq index since 1990, in percentage terms and in number of trading days from the index’s closing high to closing low in each downturn:
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Sources: Times research, Bloomberg News
