Fed Chairman’s Warning Fails to Short-Circuit Growth Stocks
Alan Greenspan is looking like the best friend emerging-growth stocks ever had.
Despite the Federal Reserve chairman’s latest warning that the central bank is likely to raise interest rates further, technology and health-care stocks surged Thursday, lifting key growth-stock indexes to record highs.
The Russell 2,000 small-stock index jumped nearly 2% to a record 558.42, and the Nasdaq composite rocketed 2.7% to a record 4,548.92.
Nasdaq trading volume topped 2 billion shares for the first time.
If Greenspan was in part seeking to scare investors into a more cautious mode, his words had that effect only on some owners of blue-chip stocks: The Dow Jones industrial average slid 46.84 points to 10,514.57.
Ironically, for the hottest sectors of the market--tech and health care--the Fed’s campaign to slow the economy via higher rates seems only to give more investors reason to buy.
In part, the continuing rally in those stocks is a “momentum” story: The growing army of short-term traders in the market, including many individual investors, looks for what’s already moving up and simply piles on for the ride.
“Investors are continuing to go to where the stocks are doing well, and that’s the Nasdaq,” said Robert Freedman, executive vice president of John Hancock High Net Worth Funds. “Dow stocks are looking really cheap, but people want to go where the action is, and that’s in biotech, Internet and telecommunications.”
But the fundamental story behind the hunger for stocks in those industries is that the companies’ cutting-edge products and services aren’t likely to experience the same kind of slump in demand that may hurt more traditional industries if the economy finally slows.
In fact, one rationale behind paying sky-high price-to-earnings ratios for many tech stocks is that, in a weaker economy in which many companies have even less power to raise prices for their goods, the demand for productivity-enhancing technology may just strengthen.
Still, many analysts say the speculative frenzy in such stock sectors as semiconductors and biotechnology is fraught with danger: Share prices don’t rise in a straight line forever, experts warn, and the next sell-off could be brutal.
For now, however, there are few signs that the market’s split performance is nearing an end.
Within the Russell 2,000 index, the health-care subgroup is up 57.8% this year, fueled by biotech stocks’ gains. But such sectors as auto-related issues, consumer services and financial services all are down year-to-date.
Overall, however, winners topped losers by 23 to 18 on Nasdaq on Thursday, while losers had a modest edge on the Big Board.
In the bond market, Greenspan’s words helped push shorter-term yields higher. The yield on the two-year Treasury note jumped to 6.67% from 6.60% on Wednesday.
But the 30-year T-bond yield eased to 6.22% from 6.27%--suggesting that long-term-bond investors believe the Fed’s efforts ultimately will restrain inflation.
Among the day’s highlights:
* Biotech was the hot spot, amid soaring interest in the sector--especially those firms involved in the study of gene structure as a way of designing effective drugs. Alkermes surged $28.63 to $168.75, Maxygen leaped $23 to $121 and Millennium Pharmaceuticals soared $54.06 to $314.56.
Carlsbad-based Immune Response leaped $4.56 to $15.31 after saying it synthesized a new human gene factor related to hemophilia.
* Surging tech issues included Sun Microsystems, up $4.13 to $96.13; FileNet, up $5.25 to $35; Agilent, up $16 to $97; and Parametric Technology, up $4.94 to $27.19.
But DoubleClick plunged $15.75 to $90.75 on fears over legal challenges to its use of personal data collected on the Web.
* On the down side, retail stocks were hammered as investors dumped on worries about slower consumer spending if interest rates keep rising. Wal-Mart plunged $4.38 to $48.38 and Gap sank $6.88 to $42.13.
* Bank stocks also slid, with Citigroup off $1.13 to $52.50 and Wachovia down $1.19 to $58.38.
* U.S. Home soared $10 to $34.88 after Lennar said it will pay $36 a share for the rival builder. Lennar rose 94 cents to $16.94.
Associated Press contributed to this report.
Market Roundup, C7
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Smaller Stocks’ (Sort of) Bull Run
Despite renewed warnings on Thursday of higher interest rates, the Russell 2,000 small-stock index surged nearly 2% to a record high--even as the Dow Jones industrials fell again. But in the small-stock universe, as in the broad market, this bull run is mostly about health-care and technology stocks.
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. . . While Health Care and Tech Rocket
Monthly closes and latest for Russell 2,000 health-care and technology subgroup indexes:
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Performance by Industry Sector Is Mixed . . .
Performance of Russell 2,000 subgroup indexes, 1999 and year-to-date Thursday:
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Source: Bloomberg News
