Stocks Fall on Last Day of Nasdaq’s Worst Year
This may well be remembered on Wall Street as the Year of the Great Payback.
The winners early in the year--the technology stocks whose dramatic run-up had mocked classic investing rules--were hammered for more losses Friday, leaving the Nasdaq composite index with the biggest calendar-year drop for a major stock benchmark in nearly seven decades.
Meanwhile, the stocks that emerged at the top of heap for 2000 were many of the same “value” issues that investors had jettisoned at the start of the year in their eagerness to own anything-tech.
All in all, however, 2000 goes down in history as a loser on Wall Street, as investors turned increasingly pessimistic in the fourth quarter about the U.S. economy’s outlook after years of hot growth.
Nasdaq stole the spotlight both in its boom and in its bust, as tech stocks quickly gained hundreds of billions of dollars of market value, only to see much of it disappear just as quickly--along with such seemingly bright “dot-com” ideas as Pets.com, Mortgage.com and Furniture.com.
Instead, investors by the second half of the year developed a renewed affection for such aged business concepts as cigarettes (Philip Morris, up 91% for the year), electricity generation (Duke Energy, up 70%) and auto insurance (Progressive Corp., up 42%).
With Friday’s decline of 87.24 points, or 3.4%, to 2,470.52, Nasdaq slumped 39.3% for the year. That is the biggest decline in the index’s 29-year history and the largest calendar loss for one of the three major market indexes since the Standard & Poor’s 500 dropped 47% in 1931, during the Great Depression.
From its peak on March 10, Nasdaq is down 51%.
The pain in the rest of the market seemed mild by comparison. The S&P; 500 lost 13.94 points, or 1%, to 1,320.28 on Friday, bringing its decline for the year to 10.1%. From its March peak the S&P; is down 13.6%--in “correction” mode, but far from the 20%-plus decline that officially marks a bear market.
The Dow Jones industrial average fell 81.91 points, or 0.8%, to 10,786.85 on Friday, and for the year eased just 6.2%.
Even so, the Dow’s loss was the worst for any calendar year since 1981. The S&P;’s loss was its worst for a calendar year since 1977.
This year marked the end of an era: The S&P; 500’s loss came after an unprecedented five straight years of 20% or better total returns (price gain plus dividend income).
The Nasdaq index also had gained for five straight years, and in 1999 alone had soared nearly 86%--unheard of for a broad market index.
After such an amazing streak, many investors may well accept that the market was due for a pullback. But the percentage figures can be misleading in assessing the damage, especially in the case of the year’s biggest losers in tech.
An investor who put $1,000 into the Nasdaq composite index at the beginning of 1999 had $1,856 at the beginning of 2000. Now, that investment is worth $1,127 after this year’s decline.
In other words, the two-year gain for Nasdaq is a mere 12.7%.
Still, because so many pockets of the market advanced this year even as technology collapsed, the average U.S. stock mutual fund lost only about 1% for the year, according to preliminary data from fund-tracker Morningstar Inc.
In the context of a slowing economy that by the fourth quarter was slashing tech companies’ sales and earnings growth prospects, many investors chose not to leave the market entirely, but to seek out stocks that might hold up better in troubled times.
Energy, tobacco, defense, drug, savings and loan and real-estate-related shares have soared as investors jumped into stocks that offered the prospect for growth, but at much cheaper price-to-earnings valuations than many tech and telecom issues.
Energy and utility companies made up five of the 10 best performers in the S&P; 500 for the year, according to Bloomberg News. The energy sector, of course, zoomed as oil and natural gas prices rocketed worldwide. Utilities--at least those outside California--gained as a shortage of electricity sent rates rocketing.
Athletic-shoe maker Reebok International ended a three-year losing streak to soar 234% and post the biggest gain in the S&P; 500, as its global sales remained strong.
Philip Morris, maker of Marlboro cigarettes and Miller beer, led the gain in the Dow industrials, nearly doubling as investors bet the worst of the company’s legal woes are over.
At $44 a share, Morris is priced at 12 times this year’s expected earnings per share.
By contrast, last year’s biggest winner, wireless technology company Qualcomm, plunged 53% in 2000 as investors worried about the company’s long-term growth potential--and about its price-to-earnings ratio. At the current price of $82.19 the stock still is valued at 65 times this fiscal year’s expected earnings per share. That is more than twice the P/E of the average blue-chip stock.
What, exactly, sparked investors’ reversal of sentiment in 2000 may never be completely clear. Some analysts say that the sense by March that the Federal Reserve would continue to raise interest rates finally hit home with investors. The Fed raised rates in mid-March and May.
Perhaps it was the beginning of the realization that the Internet business models of so many up-and-coming tech companies were doomed to failure, or at least to far slower growth than investors initially believed.
Once the selling in tech began it continued through May. Though tech stocks then rallied in summer, many investors were already looking for safer bets in the “old economy.”
Many investors also turned to small and mid-size stocks. Indeed, mid-cap stocks were stars for the year, with the S&P; mid-cap index up 16.2%.
As the economy slowed in the third quarter, the fix appeared to be in for tech stocks: Nasdaq began September with a sell-off that continued relentlessly through the end of the year.
But earnings growth is slowing in more sectors than technology. Earnings for the companies in the S&P; 500 are expected to rise 7.7% in the fourth quarter, the slowest pace in four years, according to earnings-tracker First Call/Thomson Financial.
Still, the slowdown has been pronounced for computer-related and telecommunications companies: Fourth-quarter profit is now expected to grow 4% for the 82 tech companies in the S&P; 500, according to First Call.
For all the pain in the U.S. market, it was worse in many overseas markets: Forty-seven of the 62 primary stock indexes tracked by Bloomberg dropped for the year in dollar terms.
The Mexican market fell 20.7% in native-currency terms. The Japanese market lost 27.2% and the South Korean market plummeted 51%.
As 2001 looms, many Wall Street pros wax bullish, arguing that the slowing economy will be treated by the Federal Reserve with interest rate cuts.
The U.S. market, the bulls note, hasn’t had two back-to-back down years since 1973-’74.
But if that’s heartening to some, it may be worrisome to others who fear it’s an invitation to the market to teach a more painful lesson about what can go wrong for stocks.
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Wall Street 2000: Much Pain, Some Gain
The stock market closed 2000 on a down note Friday, which seemed fitting given the broad market’s pain for much of the year. Yet even as tech stocks crashed and blue chips overall lost ground, there were pockets of significant strength--mainly among “value” stocks.
S&P; 500 index, annual price changes
Nasdaq composite, annual price changes
Winners in a Rough Year
Despite the losses in the average blue-chip and Nasdaq stock, some market sectors shined in 2000. Among the leaders:Reversals of Fortune
Some of the hottest stocks of 1999 became the biggest bombs of 2000, while some of 1999’s dogs became stars in 2000. A sampling:
1999 Stars
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1999 2000 Stock change change Qualcomm +2,619% -53% Broadvision +1,494 -79 JDS Uniphase +830 -48 Yahoo +265 -86 Lucent Tech. +36 -81
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2000 Stars
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1999 2000 Stock change change Reebok -45% +234% Philip Morris -57 +91 Valero Energy -6 +87 Duke Energy -22 +70 Progressive -57 +42
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