Dow’s Plunge Below 10,000 Sparks Fears
The stalwart Dow Jones industrial average closed Friday below 10,000 for the first time in nearly 11 months, the most dramatic evidence yet of the widening gap between booming technology stocks and struggling “old economy” issues.
Orange County stocks have followed a similar pattern this year, as technology stocks have been surging while many retailers, financial institutions and old-line industrial companies have taken a drubbing.
The close below the symbolic 10,000 level sparked new worries that investors’ migration out of industrial stocks might intensify. Many experts fear that such a split personality in the market can’t go on forever and will ultimately resolve itself with an ugly sell-off of tech stocks as well.
“If anybody thinks [the Dow drop] doesn’t affect the investors’ psyche, they’re wrong,” said Hugh Johnson, chief investment officer at First Albany Corp. “The decline itself can be demoralizing and can invite more selling.”
The Dow tumbled 230.51 points, or 2.3%, to 9,862.12, after an economic report Friday spurred new fears of higher interest rates. The decline left the widely followed index of 30 stocks nearly 16% off its peak reached six weeks ago.
Meanwhile, the technology-heavy Nasdaq composite index fell only 0.6%--after setting a record high the day before.
The Nasdaq has doubled in the last year, while the Dow has risen but 6%. Such a market divergence is highly atypical, analysts note.
That “old economy/new economy” split vastly oversimplifies what’s happening on Wall Street, of course. After all, the Dow now includes such technology giants as Microsoft Corp. and Hewlett-Packard Co. as well as the likes of International Paper.
But there’s no question that, at the moment, investors keep flocking to tech stocks because they believe those companies have far greater earnings growth prospects than the old-economy companies.
“Investors are chasing what worked last year, which, broadly speaking, is technology,” said Thomas McManus, a market strategist at Banc of America Securities in New York. And now there’s more of an “urgency by investors to swap out of what hurt them last year into what they perceive is strong growth for many years.”
That urgency has quickened in the face of rising short-term interest rates, which have been lifted by the Federal Reserve Board in its bid to slow the U.S. economy’s robust expansion and thus keep higher inflation at bay.
The economy’s strength was evident again Friday, when the Commerce Department said the gross domestic product surged by a revised 6.9% in the fourth quarter--its biggest annualized gain in more than three years. For many investors, that only validated expectations that the central bank will lift rates even higher this spring.
There’s widespread agreement that the climbing lending costs stand to hurt the old-economy stocks the most because those companies--their stocks already depressed--will have to depend more on borrowing to raise cash for expansion. The new-economy firms, by contrast, can use their soaring stocks to make acquisitions or raise cash to build their businesses, so they’re more immune to higher rates.
“The old-economy companies depend on capital that is sensitive to interest rates, whereas the new-economy companies are getting new capital at zero cost,” said Rao Chalasani, chief investment strategist at Everen Securities Inc. in Chicago.
To be sure, stocks of virtually all stripes fell Friday, and most of the market’s major indexes lost ground. But the worst hit was the Dow Jones industrial average, as the blue-chip measure plunged to its lowest level since April 1, 1999, when it stood at 9,832.51. The average first climbed above 10,000 only three sessions before that, last March 29.
Since reaching its record high of 11,722.98 on Jan. 14, the Dow has been hit by a sudden and substantial pullback, or “correction,” as Wall Street calls it.
How wide was the gulf Friday between stocks of the old and new economy?
The market’s main barometer of the technology sector--the Nasdaq composite index, which includes nearly 4,700 companies--slipped only 27.15 points, or 0.6%, to 4,590.50. In the prior two sessions, the index recorded record highs even as blue-chip shares continued to stumble.
The market divide was also evident in Orange County, where a dozen technology companies have seen their shares at least double since Jan. 1, while many old-guard firms have struggled.
Shares of local technology hotshots Newport Corp. and Powerwave Technologies Inc. have each shot up more than 170%. But such fixtures as engineering giant Fluor Corp., drug wholesaler Bergen Brunswig Corp. and apparel chain Pacific Sunwear of California have seen their shares tumble more than 30% this year.
Overall, the picture locally has remained rosy. The Bloomberg Index that tracks 131 county stocks--including many technology issues--has climbed 24% so far this year, closing Friday at an all-time high.
The surge reflects the presence of precisely the types of industries that have thrived as the Dow has swooned--medical products firms, software makers and high-speed-communications companies, Chapman University President James Doti said.
The area has also gained from having a relatively small number of Internet companies, one segment of the technology sector that has skidded, Doti said.
Such high-tech stars as Broadcom Corp., Conexant Systems and QLogic Corp. have attracted investors who have pulled their money out of old-guard firms due to fears of rising interest rates, said Radha Bhattacharya, professor of economics at Cal State Fullerton.
“They take the money out of the old-economy stocks [and] where will they put it? Bonds don’t look good, gold doesn’t look that good. So they go in for these high-tech stocks,” she said. “They’re betting high-tech stocks will lead the economy’s growth.”
Elsewhere, examples of investors’ tech ardor were abundant Friday, even if they were being picky.
Shares of database-software maker Oracle Corp. and telecom equipment builder Lucent Technologies Inc. rallied. So did the stock of tiny Puma Technology Inc., which makes software for bringing the Internet to wireless phones and other mobile devices.
Yet many of the Internet’s other high fliers ended lower, including online auction leader EBay Inc., Web giant Yahoo Inc. and the big Internet-networking company Cisco Systems Inc.
So what happens now?
The stock market constantly surprises, of course. But many analysts and economists say there’s no hint the Federal Reserve, led by Chairman Alan Greenspan, will soon abandon its effort to tighten credit.
“The economy was smoking during the fourth quarter,” said economist Richard Yamarone of the investment firm Argus Research Corp. “Fire Chief Greenspan is determined to extinguish this blaze before it turns into a five-alarm fire.”
Greenspan also is seen as wanting higher rates partly to brake the so-called wealth effect coming from the stock market, whereby consumers who are making substantially more money in stocks--especially in shares of Internet and telecom companies that have soared in price--also are spending more, further swelling the economy’s growth.
But analysts disagree as to whether the heavy selling of the old-economy stocks--many of which now are seen as “value” stocks because they’re cheaply priced relative to the companies’ underlying earnings and assets--is nearing an end.
The market’s pessimists fear that the steady erosion of the Dow Jones industrials and other stocks that are especially sensitive to lending costs--such as banks and other financial services companies--could snowball as investors stem further losses in those groups and sell at any price.
Meanwhile, the frenzy for anything tech-related is sending money cascading into mutual funds that focus on those names. And fund managers who have any cash available at all--worried that they are falling further behind the tech juggernaut--are funneling those dollars into many large and small stocks involved in tech.
“The correction is simply not over yet as we can see by the continuing pressure on stocks like GE, Coke and Merck,” said Charles Pradilla, chief investment strategist at SG Cowen Securities in Boston. “People are moving out of the old economy into the new economy.”
Indeed, General Electric Co.’s stock has plunged 19% already this year. Coca-Cola Co.’s stock is down 16% year-to-date, and drug bellwether Merck & Co. is off 10%.
Everen’s Chalasani added that “by raising rates, he [Greenspan] is doing the opposite of what he wants to do” in terms of the wealth effect. “He’s not putting a dent in the tech stocks, but he’s putting a deep dent in the old-economy stocks.”
But some analysts say the stock market is overdue for a significant pullback. After all, to many analysts the bull market is now 17 years old, and investors can’t expect to keep getting the 20%-plus annual returns they’ve enjoyed in recent years, many pros argue.
Others see a silver lining in the market’s recent behavior.
“I think the value stocks are now moving from weak hands into stronger hands,” said McManus, meaning that scared investors are selling those stocks to patient, savvy professionals who will ride out the market’s current slump.
“These investors see value, and the excess supply [of old-economy industrial stocks] is allowing them to acquire that value at increasingly attractive prices,” he said. And if that continues, it could set the stage for the old-economy stocks to stage a comeback, he added.
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Associated Press contributed to this story.
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* SIZZLING GROWTH
The U.S. economy rose at its strongest rate in 3 1/2 years in the fourth quarter of 1999. C1
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* JOB GAINS
State unemployment plunged to a 30-year low, while Orange County’s inched up to 2.5%. C1
