The Nasdaq composite stock index, the new emblem of the nation’s love affair with technology, soared Thursday to close above 5,000 for the first time.
The milestone, crossed just four months after the market barometer topped 3,000, reflects one of the most stunning run-ups in Wall Street history, and is an exclamation point for the growing split between stocks of the “new economy” and those of the “old economy.”
Behind that split are individual investors such as Mark Mobley.
The Denver sports psychology consultant has two-thirds of his savings in technology stocks, ranging from well-known Lucent Technologies to an obscure wireless-data start-up named Telenetics.
“What’s going to happen three years down the road [with technology] is incredible,” he marveled. And “in 20 or 50 years, the world is going to be turned upside-down” by technology.
That kind of enthusiasm, multiplied millions of times over, has driven up the Nasdaq share index 110% over the last 12 months and lifted it 149.60 points, or 3.1%, to 5,046.86 on Thursday. This year alone the index has jumped 24%.
Dominated by hundreds of the nation’s fastest-growing, cutting-edge technology, telecom and biotech companies, the 4,600-stock Nasdaq index now is the most widely quoted stock barometer of the so-called new economy. For many investors, this 29-year-old stock index has already far eclipsed the century-old Dow Jones industrial average as a market measure.
Indeed, in recent months, the intensity of investor demand for “new-economy” stocks has stunned Wall Street--as has the ferocity of the dumping of “old-economy” stocks such as many of those in the Dow index.
Despite a 154.20-point gain Thursday to 10,010.73, the blue-chip Dow is down 13% for the year.
“I’d be surprised if it takes too long before the Nasdaq catches up to the Dow [in point terms] because of the underlying growth rates of the companies in the indexes,” says Thomas McManus, market strategist at Banc of America Securities in New York.
Signs of rampant bullishness over tech are everywhere.
Six months ago, about 1 billion shares a day were traded on Nasdaq. In four of seven trading days this month, investors have pushed daily activity to more than 2 billion shares.
Mutual funds that focus specifically on tech stocks had $32 billion in assets at year-end 1998. Those assets now top $125 billion.
As once little-known technology stocks such as wireless firm Qualcomm, semiconductor maker PMC-Sierra and fiber-optics firm JDS Uniphase carry Nasdaq ever higher, many veteran Wall Street pros fear that craving for these stocks has become a full-fledged mania that is bound to end the way other frenzies have ended--with a calamitous crash.
Tech stocks’ prices relative to underlying earnings are in the stratosphere--and that is for companies that have any earnings at all.
Bearish analysts say the tech-stock boom is now little more than a frantic pile-on of investors buying not because they trust in technology, but because they fear being left behind.
Mutual funds, for example, face unprecedented pressure to keep up with their tech-laden competitors, or face heavy redemptions from impatient shareholders.
Outside of tech, the majority of U.S. stocks already may be mired in a bear market, some say. Over the last year, almost four-fifths of the stocks in the blue-chip Standard & Poor’s 500 index have fallen 20% or more, the traditional definition of a bear market, according to Morgan Stanley Dean Witter.
“Suppose you’re a new investor,” said James Stack, an investment newsletter writer who believes the market is teetering on the brink of disaster. “You’ve seen nothing but [a] bull market and view Wall Street as a fattened cash cow. . . . Where are you going to put [your money]” but in the hottest stocks of the moment, which are tech issues.
But hordes of investors--not only individuals but also a growing number of professionals--aren’t fazed by the warnings. The Nasdaq bull market’s believers insist that the demand for tech stocks is rooted in the notion that change is constant, and that technology use has reached such a critical mass worldwide that it will give rise to unimagined industries.
No one suggests that there won’t be sharp and volatile pullbacks in the Nasdaq index. Indeed, by the traditional standard that considers a 10% drop a “correction,” Nasdaq underwent two of those in January.
But the reality of investing today is that the public--now a user of much of the technology developed over the last decade--also wants to own what’s new and hot in tech ideas, analysts say. And those ideas inevitably list on Nasdaq, instead of the New York Stock Exchange, and quickly get their shot at stardom.
“The synergistic mix of all technology [breakthroughs] of the past two decades is coming now, and some of the best new products are ahead of us,” said Peter Canelo, an investment strategist at Morgan Stanley Dean Witter in New York.
In the 4,600-stock Nasdaq composite index, new stars are born while others die in an ever-repeating cycle. Computer disk drive upstart Iomega, for example, captured small investors’ hearts in 1996 only to flame out a few months later. Ditto with Internet phenomenon Theglobe.com in 1998.
Behemoths such as Intel and Cisco Systems carried the index for several years. And while large-stock gains have become more tempered this year, a new crop of smaller tech stocks, especially biotech and telecom, has snagged investors’ fancy.
The rise to 5,000 has occurred largely without the help of the biggest tech stock of all--Microsoft, which is down 14% this year. And many of last year’s Internet stars are down dramatically from their peaks.
The Nasdaq market’s coming of age contrasts with its early image. Founded in 1971 as an electronic trading system for small stocks, it was known popularly as the over-the-counter market--and viewed with disdain by the far more powerful NYSE.
Its rise was fed by its willingness to cater to nascent companies, many of which were snubbed by the NYSE because they were not yet profitable, and hitch onto their success. Intel listed on Nasdaq in 1971, Microsoft in 1986 and Cisco Systems in 1990.
For much of Nasdaq’s history, technology was viewed as a highly cyclical business--either booming, or busting, as the personal computer business did in the 1980s.
What has happened since the mid-1990s, experts note, is that many investors have been won over by the idea that global demand for technology overall can only grow.
Certainly, the prices investors are paying for tech shares are dizzying. Compared to their expected earnings-growth rates, tech stocks are 40% overvalued, while the rest of the market is 20% undervalued, concedes Canelo.
But tech-stock bulls counter that traditional methods of valuing stocks have become antiquated.
Stocks are normally priced on how much the underlying companies are expected to earn a year or two in the future. But if anything, Wall Street has consistently underestimated the revenue and earnings growth of tech stocks, bulls say.
“There’s a difference between a mania and a natural and justified enthusiasm for a business,” said Kevin Landis, head of the Firsthand tech-fund group. “Tulips were a mania. A growth industry is not a mania because there’s something there that’s legitimate to get excited about.”
In fact, some experts say the tech-stock rally of recent years has been driven by the fact that investors failed to give technology its due for too long.
Consider the Internet stock sector: While many professionals shied away from soaring Net stocks in the mid- to late 1990s, individuals jumped in. The buyers were people who were signing on to Yahoo, buying books at Amazon.com and trading stocks on E-Trade. They saw it as following legendary investor Peter Lynch’s advice to buy what you know.
That’s what Mobley did.
The 34-year-old stepped up his tech investing after his father began working as a missionary in Uganda 18 months ago. Shortly after his arrival, it took Mobley six hours one night to fax his father a birthday card. Today, despite the fact that his father is based in a remote village that lacks running water, the two men communicate daily via e-mail.
“It’s almost as if Columbus just discovered America,” Mobley said of the new tech industries. “There’s a vast territory that is just untouched.”
Mobley and many other individuals acknowledge that tech stocks will undergo bruising corrections, but say the payoff for long-term investors will be real.
“It is not a question of whether or not technology stocks will gain. They will. It is more a question of when, [by] how much and which companies,” said Douglas James, a 28-year-old computer programmer from Victoria, British Columbia. “I figure the average investor can expect yearly returns of a minimum of 30% to 50%, with the possibility of a 20-bagger just around the corner.”
Some Wall Street pros say that kind of talk has been typical at the peak of every stock mania in history.
But even the bears admit that, in many ways, this tech-stock boom is like no other.
With Federal Reserve Chairman Alan Greenspan indicating that further interest rate hikes are in store, stocks in industries such as basic materials, retail, consumer goods, energy and transportation have fallen sharply on the notion that a slowing economy will cut demand for their products.
Historically, highly valued stocks such as those in technology have fallen the hardest as rates climb. But the opposite has occurred this year. Stocks in emerging industries have soared all the more as investors lay bets that their prospects are strong enough growth to withstand any ill effects on the economy.
“The Fed isn’t going to affect [the long-term prospects] of some business-to-business [Internet] company,” McManus of Banc of America Securities said. “The Fed isn’t going to interrupt how fast the telecom sector shifts from copper to fiber optics.”
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Nasdaq’s Soaring Fortunes
The Nasdaq composite index, which tracks 4,600 shares listed on the Nasdaq electronic market, has rocketed since 1998 amid frenzied buying of the technology, telecom and biotech stocks that dominate the index. Quarterly closes and latest since 1990:
First close above 500: April 12, 1991
First close above 1,000: July 17, 1995
First close above 2,000: July 16, 1998
First close above 3,000: Nov. 3, 1999
First close above 4,000: Dec 29, 1999
Thursday: 5,046.86, up 149.60
* Source: Bloomberg News
*ROAD TO 5,000
Nasdaq’s hot performance began well before 1999. C1
*DOW GAINS TOO
The battered DOW industrials add 154.20 to 10,010.73. C4