Sell-Off Sends Nasdaq Skidding to 2-Year Low
Stocks crumbled Wednesday, sending the Nasdaq composite index to a new two-year low, as pessimism over the economy and worries about inflation drove more investors to the exits.
Nearing the one-year anniversary of Nasdaq’s peak of 5,048, some analysts now warn that the index may have to dive below 2,000 before a final wave of selling purges the last of the great technology stock bubble.
Nasdaq on Wednesday slid 49.41 points, or 2.1%, to 2,268.94 in heavy trading, breaking below the previous 2001 low of 2,291 set on Jan. 2.
Wednesday’s close was the lowest since March 3, 1999, and left the index down 55% from its record high reached March 10, 2000, at the zenith of wild speculation in tech shares.
The broad market also tumbled, with the Dow Jones industrial average sinking 204.30 points, or 1.9%, to 10,526.58 amid heavy selling in tech, retail and banking stocks.
The blue-chip Standard & Poor’s 500 fell 1.9% to its lowest since October 1999.
Deepening fears about stalled sales and collapsing earnings in the tech sector have hammered many key tech stocks this month, after a rally in January sparked hope that the sector had finally hit bottom.
“There’s a bottom out there [but] we haven’t seen it yet. The negative earnings news has overwhelmed the ability of stock investors to see through the valley” toward an eventual economic recovery, said Thomas McManus, market strategist at Banc of America Securities.
On Wednesday, shares of Sun Microsystems sank $2.63 to $19.63, lowest since the fall of 1999, after a Merrill Lynch analyst said the slowing U.S. economy and capacity problems could further crimp revenue and profit for the server-computer maker.
The analyst cut his earnings estimate for fiscal 2001 to 65 cents a share from 68 cents. Yet even at the stock’s depressed price, it sells for 30 times that 2001 estimate--well above the average blue-chip stock’s price-to-earnings ratio of about 21.
Cisco Systems, which fell 94 cents to $25.13 Wednesday--the lowest since mid-1999--is priced at about 39 times its expected earnings per share this year.
“Tech valuations have gone from absurd and inconceivable to inappropriate. They’re still too high,” McManus argues.
For the broader market, worries about falling corporate earnings were compounded Wednesday by the government’s report of a surge in consumer price inflation in January, fueled by energy costs.
Though many analysts downplayed the inflation spike, the news helped send Treasury bond yields higher and raised new questions about how much more the Federal Reserve will be able to cut interest rates to stimulate the economy.
“We keep getting this, ‘Is this the last shoe to drop’ [thinking]” in the stock market, said Brian Belski, chief investment strategist at U.S. Bancorp Piper Jaffray. “Now this curveball of inflation has been thrown at us and we don’t know how to deal with it.”
Overall, losers topped winners by 26 to 11 on Nasdaq and by 2 to 1 on the New York Stock Exchange. Nasdaq volume was heavy.
In the tech sector, EMC fell $6.32 to $42.95, Motorola lost 97 cents to $17.33, Adobe Systems slid $4.19 to $30.06, Qualcomm dropped $4.27 to $71.25 and Tibco Software slumped $4.25 to $15.50.
But some key names bucked the downtrend, including Microsoft, up 38 cents to $56.25, and Broadcom, up $1.38 to $65.75.
Outside of tech, financial stocks were hit hard. Among banks, Citigroup fell $2.90 to $48.30 and Bank of America lost $1.37 to $47.75. In the brokerage sector, Merrill Lynch slumped $3.59 to $59.38, Lehman Bros. dropped $3.10 to $68.90 and Charles Schwab eased 62 cents to $21.23.
Some analysts tied the financial sector’s weakness to concerns about the economy overall and to worries about the Fed becoming less willing to cut interest rates.
Other weak groups Wednesday included retailing, energy and insurance.
Yet some analysts said the sell-off in the broad market may be an encouraging sign, if it indicates that investor sentiment is coming off what have been strangely high levels despite the economy’s woes.
Phil Roth, technical analyst at Morgan Stanley Dean Witter in New York, said that although investors have grown increasingly pessimistic about tech stocks, they have been buying shares in many other sectors, apparently betting on a strong economic recovery in the second half of the year.
“We have to bring expectations down for stocks in general” before the market can bottom, Roth said.
He said the market could rally in the near term, but he expects “lower lows in the spring.”
Jerry Wang, analyst at Schaeffer’s Investment Research in Cincinnati, noted in a report this week that, despite the meltdown in many tech stocks and declining earnings estimates for companies across the economy, recent surveys of professional investors have indicated rampant bullishness about stocks.
“If the market forms a long-term bottom with sentiment readings this optimistic, it will be the first time in history,” he said.
Though Nasdaq is off 55% from its peak last year, some of Wall Street’s biggest bears--now vindicated by the tech sector’s collapse--say the shares are in serious danger of dropping much lower.
A. Gary Shilling, who heads an investment firm bearing his name in Springfield, N.J., said he is sticking to his earlier forecast that the Nasdaq index could plummet 70% or more from its peak, to 1,500 or lower, before it bottoms.
Despite the battering they’ve taken already, “you still have very high prices in a lot of stocks” on a “whole host of measures,” whether it be in relation to their earnings potential, book values or dividend yields, he said.
Shilling said several factors still make him bearish, including the economic slowdown that’s leading to an alarming buildup of product inventories, and repeated downward revisions in the profit forecasts of companies, including many tech companies.
Plus, investors are increasingly worried that the Federal Reserve’s effort to reverse the economy’s slowdown with interest-rate cuts is not only failing, but signals that the central bank is much more concerned about the economy than it has publicly acknowledged, he said.
“Probably most importantly, the Fed has shot its wad” by abruptly cutting rates twice in January, “and it didn’t do any good” in terms of restoring investor confidence in stocks, Shilling said.
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Staff writer James Peltz contributed to this report.
Market Roundup: C7-8
