Fears Over Economy Spur Nasdaq Sell-Off
The cavalry didn’t arrive on Tuesday, and the result was another massacre in the technology stock sector.
A widely expected interest rate cut by the Federal Reserve failed to materialize, and in its absence worried investors pushed the Nasdaq composite index down 100.68 points, or 4.4%, to 2,207.82, the lowest close since Dec. 31, 1998.
Other market indexes suffered smaller losses, but disappointment was widespread that the Fed didn’t view another plunge in consumer confidence as reason enough to lower interest rates for a third time this year.
The Dow Jones industrial average eased 5.65 points to 10,636.88. The Standard & Poor’s 500 index lost 0.8%, while the S&P; 600 index of smaller stocks slumped 2.1%.
Nasdaq’s sell-off deepened late in the day as the Fed remained silent. Losers outnumbered winners by 2 to 1 on Nasdaq, but losers had only a modest edge on the New York Stock Exchange. Volume remained moderate.
Meanwhile, Treasury bond yields fell, suggesting that bond investors continue to believe the Fed will cut rates soon. Still, bond yields ended above their lows for the day.
The 10-year T-note yield, a benchmark for mortgage rates, fell to 4.96% from 5.04% Monday. The yield now is near a two-year low.
Over the weekend and Monday, Wall Street had talked itself into a near certainty that the Fed would respond with an immediate interest-rate cut if Tuesday morning’s Conference Board report indicated a further decline in consumer confidence during February.
“There’s a dangerous trap that the market sets for itself when it gets tied up in all the whispers and rumors about what the Fed’s going to do,” said Brian Belski, strategist at brokerage US Bancorp Piper Jaffray in Minneapolis.
Even if the stock market has an increasing influence on the “real” economy, there remains a difference between the two, and it’s part of the Fed’s job to recognize that, Belski said.
When Fed Chairman Alan Greenspan appears before the House Financial Services Committee for scheduled testimony today, “he can talk about the tension between inflation and the downturn in the economy rather than about the surprise rate cut,” Belski said.
Greenspan may very well get roasted by committee members over the Fed’s perceived foot-dragging, but better that than “making it seem they’re responding to the stock market,” said David Blitzer, chief investment strategist at Standard & Poor’s.
Blitzer argued that there hasn’t been that much more evidence of economic weakening since the last half-point Fed rate cut on Jan. 31.
Greenspan, he said, “could hang his hat on the consumer-confidence number” to perhaps justify a rate cut. However, the continuing strength in retail spending makes the consumer confidence number at least a bit suspect, Blitzer said.
For Nasdaq, now down 56% from its record high reached in March, it isn’t certain that lower interest rates would help much. But amid plunging earnings estimates for many tech companies as the economy slows and as tech firms suddenly find themselves with huge product inventories, analysts aren’t sure where else to turn besides to the Fed.
Losers Tuesday included PMC-Sierra, down $6.63 to $37.94; Vitesse Semiconductor, down $6.81 to $43.56; Emulex, down $3.94 to $30.13; EMC, down $3.34 to $41.66; and Brocade Communications, down $5.13 to $43.50.
It didn’t help that key analysts at brokerage giant Goldman Sachs suggested that it’s still too early to buy tech shares.
Indeed, despite many powerful rallies since the tech collapse began last March, investors betting that the bottom had finally been reached have been consistently wrong.
The erosion in tech stocks will come to an end one day, Blitzer said, but two things must happen before that occurs: First, there has to be utter capitulation, a sense that tech stocks are hopeless. That process may have begun with Goldman Sachs’ decision to basically throw in the towel, Blitzer said.
But the second requirement is that there be some visible and credible buyers of the shares.
“There has to be somebody willing to look like a lunatic to go around buying Cisco and Dell now and who we’ll all hail as a genius six months from now if he turns out to have been right,” Blitzer said.
Among Tuesday’s highlights:
* Tech’s decline was across all sectors, including networking, software, semiconductors and telecom. The Amex networking stock index plunged 5.9%. The SOX semiconductor index dived 5.1%.
* An earnings warning from Nike took the wind out of the recent rally in shoe stocks. Nike plunged $9.57 to $39.60, K-Swiss slid $1.50 to $31.88 and Timberland lost $1.66 to $55.71.
* Buyers focused on so-called defensive stocks. Philip Morris surged $1.76 to $48.26, Anheuser-Busch jumped $1.21 to $44.45 and Safeway leaped $2.45 to $55.80.
* Insurance stocks also advanced as money fled tech. American International Group jumped $3.12 to $84.62, Progressive gained $3.09 to $100.61 and Jefferson Pilot rose $1.73 to $68.81.
* Some retail issues gained, despite the sour consumer confidence data. Home Depot rose 85 cents to $44.60 and Target added 57 cents to $38.37.
Market Roundup: C8-9
