Stocks Plummet as Fears Grow Over Profits, China
Stocks suffered another severe plunge Tuesday, as deepening fears over the technology sector’s woes were compounded by the standoff with China over a downed U.S. spy plane.
Once again, the market slide was spearheaded by slumping tech stocks. But selling spilled into virtually all market sectors on very heavy trading volume.
The Nasdaq composite index, which is packed with already depressed tech stocks, crumbled an additional 6.2% to 1,673.00, its lowest since October 1998. The blue-chip Dow Jones industrial average skidded 3% to 9,485.71.
The sell-off followed a slew of earnings warnings and layoff announcements Monday from former Internet stars, a growing number of which now appear destined for total collapse.
Even though pessimism about the technology sector has been rampant for six months or more, the latest warnings raised the specter of a far lengthier decline for tech companies than many investors had imagined, analysts said.
The industry has been devastated in recent months as businesses have dramatically scaled back their purchases of new equipment amid the economy’s slowdown.
Until recently, many investors had expected corporate spending to revive later this year or early next year as the economy improved and a glut of oversupply of tech equipment was slowly overcome.
But some investors now fear it could take years for investment in computers and networking equipment to rebound significantly.
“We continue to find out that we haven’t gotten a handle on technology earnings and business prospects, so these stocks continue to get hammered,” said Charles Blood, chief market strategist at investment firm Brown Bros. Harriman in New York. “The negative psychology is its most intense right now.”
The Bush administration’s clash with the Chinese government over the fate of a downed U.S. Navy spy plane also uncorked selling pressure, analysts said.
“This Chinese thing certainly didn’t help,” said Jon Brorson, director of stocks at the Northern Funds group in Chicago. “A year ago, no one would have cared. But this is a bear market, and the glass is [viewed as] half-empty.”
The latest selling wave has pushed share prices of prominent technology companies down to once-unimaginable levels.
For example, Cisco Systems, Oracle and Sun Microsystems each trade for roughly $13 to $14 a share now--not far from the single-digit level that is often viewed as the territory of highly speculative stocks.
Yet the ongoing dilemma for tech investors is that many of the stocks are still pricey compared with the underlying earnings of their firms. That is so in part because, even as the stocks have cratered, so too have the companies’ earnings prospects. As a result, the ratio between share prices and company earnings remains high by historical standards.
This year already seems assured of being a washout for earnings at many tech firms. Christopher Wolfe, a strategist at J.P. Morgan Chase’s private bank, estimates that U.S. corporations spent about $600 billion last year on tech equipment and some related personnel. That could fall to $400 billion this year, he said.
Thus, even though the Nasdaq index has plummeted 67% from its peak in March 2000--the worst stock crash for a major U.S. index since the Depression--many investors are reluctant to step up and buy tech shares because the industry’s fundamentals remain so grim.
What’s more, the news from many once-promising Internet-related firms this week was particularly troubling, suggesting Wall Street has underestimated the number of companies that will fail outright.
On Monday, Ariba, last year a highflying electronic-commerce software firm, said it will slash one-third of its work force because of worsening losses.
Its stock, once priced at $183 a share, sank to $4.44 on Tuesday.
But earnings warnings haven’t been limited to the tech sector this year--which explains why investors have been dumping a broad array of stocks in recent weeks.
Yet the market’s decline contrasts with the far less dire picture painted by recent economic data.
Because investors try to anticipate economic conditions six to 12 months in advance, the plunge in the market suggests that they believe the economy is headed for recession, analysts say. But economic statistics send a much less downbeat message.
“The economic numbers tell us that the economy is slowing down and some industries are having problems, but that it’s not turning into a downward spiral,” Blood said. “But the stock market is in a downward spiral. And we keep wondering, which one do we trust?”
Exacerbating the magnitude of the sell-off, analysts say, is that despite a sizable amount of cash on the sidelines, relatively few investors want to buy stocks now. In Wall Street parlance, a “buyers’ strike” is allowing share prices to continue cascading lower.
“Very few people are contrarians and are willing to step up [and buy], because you can lose a lot of money” if you’re wrong, said Robert Bissell, president of Wells Capital Management in Los Angeles.
The selling Tuesday also was driven by fears over how individual investors could react to the sharp drop in mutual fund values this year.
Analysts said some funds are selling stocks to raise the necessary cash to pay off any investors who redeem their funds after first-quarter statements arrive in the mail this month, detailing hefty losses--the largest many investors probably have ever suffered in stocks.
In February, there were net redemptions from stock funds for the first time since August 1998, according to the industry’s trade group. Tech funds have been hit by net redemptions for seven straight weeks, said Bob Adler at fund tracker AMG Data Services.
At Janus Capital, which is known for its growth-oriented stock funds, retail equity fund outflows in March rose from the month before, a spokeswoman said. The firm had an outflow of about $1.8 billion in February, its fifth straight month of net redemptions, according to data tracker Financial Research.
Still, the overall outflows from mutual funds have been a relative trickle compared with the $3.7 trillion in assets the funds hold.
In the stock market, investor psychology--rather than underlying fundamentals--can be crucial in determining short-term direction. And right now, sentiment is decidedly bearish.
In the odd ways of Wall Street, that’s both a good and a bad sign.
On one hand, it’s negative because it can spur more selling--and a continuing buyers’ strike.
But on the other hand, rising bearish feelings are a positive longer-term signal: For stocks to bottom definitively, the bulk of the selling pressure in the market must be wiped out. And traditionally, that happens only when investors are at their most bearish and when virtually everyone who wants to sell has sold.
In fact, some Wall Street observers are becoming more optimistic precisely because more investors are becoming pessimistic.
For example, brokerage Salomon Smith Barney in New York advised investors Tuesday to increase their exposure to stocks.
Borrowing a phrase from the “Seinfeld” TV show, Tobias Levkovich, a Salomon equity strategist, said current sentiment is in a “bizarro world.” He noted that investor sentiment polls continue to show that many investors claim to be bullish on stocks.
After meeting recently with professional investors, Levkovich said, “I have no idea who the bulls are in those surveys because I haven’t met one. Maybe they’re using butterfly ballots.”
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Times staff writer Josh Friedman contributed to this report.
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Blue-Chip Woes
The blue-chip Standard & Poor’s 500 index, a stock market gauge to which many Americans’ retirement funds are tied, fell to a two-year low Tuesday amid broadening Wall Street losses.
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S&P; 500 index, weekly closes and latest
Tuesday: 1,106.46
Source: Bloomberg News
