Nasdaq Slips Below 3,000 on a Seesaw Day
The Nasdaq composite index slipped below 3,000 for the first time in more than a year Monday, as the latest earnings warning from a market leader--this time computer maker Hewlett-Packard--rocked the technology sector.
Both Nasdaq and the Dow Jones industrial average rebounded from their lows of the day, but the indexes tailed off again toward the end of trading, apparently on continuing worries about the presidential election impasse.
The Nasdaq index, in its sixth straight loss, fell 62.27 points, or 2%, to 2,966.72. Nasdaq is off 27% year-to-date and 41% from its March record high.
The Dow Jones industrial average sank 85.70 points, or 0.8%, to 10,517.25, with Hewlett-Packard the big loser among the 30 companies in the index. The Standard & Poor’s 500 index dropped 14.72 points, or 1%, to 1,351.26.
Overseas markets sank across the board, in reaction to Wall Street’s troubles and the election stalemate.
Also weighing on investors was news that the Organization of Petroleum Exporting Countries had decided not to boost oil production. Crude oil prices rose, partly on the cartel’s vote and partly on forecasts of cold weather.
Rising gasoline prices and a tumbling stock market both can curb consumer spending. Analysts say that those factors, coupled with higher interest rates, already are being reflected in slow sales by retailers ranging from Best Buy to Kmart to Gap to Lands’ End.
The government today reports retail sales for October. Chief economist Christopher Low of First Tennessee Capital Markets expects the number to be weak, perhaps even a decline from September, which he said could presage a poor Christmas season for merchants.
On Wednesday, the Federal Reserve Board meets to discuss interest rate policy. Despite the weakness in the U.S. economy, most economists expect the central bank to refrain from cutting interest rates or even signaling a looser stance.
The economic slowdown is being felt all across the economy, as the ongoing shakeout in the high-tech sector illustrates.
Hewlett-Packard shares tumbled $5 to $34.13 after the company fell far short of the consensus earnings forecast of Wall Street analysts. H-P said it earned 41 cents a share from continuing operations, 10 cents below expectations, largely because its profit margins are being squeezed by competition.
“In the PC business, Hewlett’s margins are getting killed by Gateway and Dell,” Low said, “and in capital equipment, it’s getting killed by Cisco Systems.”
Much of the money that investors poured into technology stocks during the Nasdaq boom resulted in greater production capacity and heightened price competition for the firms in that arena, Low and other analysts said.
Even after the technology-stock collapse of the last few few months, profit expectations for next year probably are still too high for some of the most popular tech firms, analysts said, implying that there is still more damage to come in Nasdaq.
“Technology does have a cyclical nature, and with the economic cycle slowing from 6% [GDP growth] to 3%, there are going to be more downward revisions,” predicted Michael Straus, senior economist at Commonfund Asset Management in Wilton, Conn.
Still, a few popular tech stocks have been beaten down to the point that some of them started looking like bargains Monday.
In early trading, as the Nasdaq index slumped more than 5%, investors who had been holding back began snapping up stocks like Cisco, Intel and IBM. Cisco rose 31 cents to $50.38, Intel climbed $1.19 to $38.19, and IBM was up $4.44 to $97.44.
Nasdaq rebounded all the way into positive territory before falling back at the end. Many traders who “played the bounce” sold their stock late in the day, satisfied with very short-term profits.
“These days, nobody wants to go home with too much exposure,” said Anthony F. Dwyer, chief market strategist at Kirlin Securities.
Even with its comeback, declining issues outnumbered advancers by almost 2 to 1 on Nasdaq, where volume exceeded 2 billion shares.
Breadth was more favorable on the New York Stock Exchange, where declining issues led advancers by about 17 to 12 amid heavy volume.
Some sectors stayed out of favor all day, however. The Amex biotechnology index, for instance, plummeted more than 11% on worries that biotech stocks are overvalued.
A tough question for the markets going forward is whether valuations have fallen to the point that a sustained rally can be mounted.
“There is some cash building up on the sidelines, and we may see that coming back,” said Elizabeth MacKay, chief strategist at Bear Stearns.
“You’ve got an unusual situation with the election,” MacKay said. “Once that passes--and it will--you could see a year-end rally.”
The health of the economy will be the biggest determinant of whether stocks can sustain such a rally.
The Fed’s campaign of interest rate increases, during which it hiked its key short-term rate to 6.5% from 4.75% between June 1999 and May of this year, is the 11th period of significant Fed tightening since World War II, according to Alan Skrainka, chief market analyst at Edward Jones in St. Louis.
Seven of the 10 previous tightening campaigns resulted in economic “hard landings”--that is, recessions, Skrainka said. Chances are good that the Fed will get the slowdown it wants without a recession, but certainly a recession isn’t out of the question, he added.
The problem for the stock market is that “the slowdown is real, yet many investors have yet to factor it into their calculations about individual stocks,” Skrainka said.
If Hewlett-Packard for example, says it thinks it can achieve 15% to 17% profit growth next year, investors “ought to be wondering whether its really going to be 12% to 15%,” he said.
Skrainka downplayed the impact of the continuing controversy over last week’s presidential election on the markets.
“I don’t deny politics is playing a role,” he said. “It’s just not the key factor.”
Market Roundup, C14-15
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WHAT NOW?
Experts offer six tips on how to maneuver through today’s dicey market. C6
* MARKET RERUN
The tech drop is looking more like the bear market of 1973 and 1974. C6
