An Unhappy Anniversary
Misery may love company, but for Nasdaq it has been a pretty lonely crash over the last year.
The plunge in technology stocks that began last March is on the verge of setting a record: At 2,117.63 Friday--after another losing week--the Nasdaq composite index is off 58.1% from its peak close of 5,048.62 on March 10, 2000.
An additional 100 points off and the current Nasdaq bear market will surpass the 1973-’74 decline of 59.9% brought to us by OPEC, raging inflation and the demise of the Nixon presidency.
In the stock market as a whole, however, the last year has witnessed only a garden-variety “correction” in most major share indexes. Consider: The average New York Stock Exchange issue is down just 7.5% from its 2000 peak.
The blue chip Standard & Poor’s 500 index, which the folks at S&P; loaded up with tech stocks in recent years, is down 19.2% from its March 2000 peak, nearing the 20% mark that has historically been considered the threshold for an official bear market. Still, that’s a third of what Nasdaq has lost, and it certainly can’t be called a crash.
Yet even people who knew better than to pay last spring’s prices for tech stocks may not be feeling terribly smug today. Your own portfolio may have come through the last year relatively unscathed, but what about the next year? Is Nasdaq’s crash really irrelevant, other than for the investors who bet too much on technology? Or is it the start of something much worse for the broader market?
Clearly, much of what has occurred in the last year has been a dramatic, but arguably overdue, rebalancing of stock market wealth. Technology stocks had rocketed in 1998, 1999 and early 2000 at the exclusion of the vast majority of other stocks. As tech shares have plunged from their stratospheric valuations of last spring, some money has left the stock market, but much has simply moved into other stocks.
That explains why indexes of small and mid-size shares, for example, have fallen less than 10% from their peaks. Though many of the technology shares in those indexes have collapsed, their losses have been largely offset by gains in non-tech issues.
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Likewise, investors have rediscovered the appeal of “value” stocks. Shares of tobacco giant Philip Morris a year ago were priced at $20 a share, which was a mere five times the company’s expected earnings per share in 2000. Shares of computer networker Cisco Systems, by contrast, sold for about 190 times earnings per share at their peak.
As Cisco shares have fallen 73% from their record high, Philip Morris shares have soared 140%, to $49.70 now. The market decided that Cisco had become far too expensive, while Morris had become far too cheap, and rebalanced accordingly.
Even this year, as nearly all major stock indexes have lost ground (with tech, again, leading the decline) a surprising number of stocks have risen.
Richard Bernstein, an analyst at Merrill Lynch & Co. in New York, calculates that 90.3% of the non-tech and non-telecom shares in the S&P; 500 held up better than the index’s 9.1% drop in February. In other words, even if the stocks fell, they fell less than the index itself.
What’s more, 43% of all stocks in the S&P; rose in February--another sign that, as money continues to exit technology, much of it is looking for a home in non-tech stocks rather than fleeing to the sidelines.
“The bear market for tech, but nothing else, continues,” Bernstein said.
Many investors would argue that he’s being far too glib. The average U.S. stock mutual fund has lost 6.8% so far this year, after a mere 2% loss last year, according to Morningstar Inc. Much of this year’s slide may be tied to the ongoing tech plunge, but the market pullback has been broader than that. The average health-care stock fund is down 11.1% this year, for example, and the average utility stock fund is down 4.2%.
Until last fall, investors and corporate executives may have fretted over the substantial paper wealth lost in Nasdaq stocks, but the economic fallout seemed negligible.
Now, of course, we know that the economy has slowed sharply, at least in part because some investors are feeling poorer and have reined-in their spending.
At the corporate level we know that orders for technology equipment have weakened significantly in recent months, leading to a wave of earnings warnings from tech companies large and small. That is working its way down the food chain to companies that supply tech firms with goods and services.
The economy just feels bad to many people, and it should: This is what happens in a slowdown.
From investors’ viewpoint, weakness in corporate earnings is a fundamental reason to avoid stocks, or at least to pick much more carefully than when the economy is booming; there isn’t much mystery involved in that thought process.
But Wall Street’s bulls--and there are still plenty of them--insist investors now have to shift their gaze to the end of this year and to 2002, and to the likelihood (they say) of a rebounding economy.
The optimistic view is that Nasdaq’s crash is an isolated event that will have limited long-term fallout. Its effects, say the bulls, will be offset by two main positives: continuing interest rate cuts by the Federal Reserve, which has already reduced its key rate one percentage point this year; and a federal income tax cut.
Edward Kerschner, investment strategist at UBS Warburg in New York, views the long list of threats to the economy and market today--Nasdaq’s crash, the energy crisis, weaker tech spending, a still-huge U.S. dependence on foreign capital--as the proverbial “Wall of Worry” that will ultimately be surmounted.
“When stock prices have fallen and investors are staring at the Wall of Worry, they tend to overlook the positives,” Kerschner said.
He has a point. The problem--and opportunity--in markets like this one is that investors can begin to view all stocks as too expensive and too risky given the economic backdrop. Yet many companies will undoubtedly come out of this period in fine health. Unless another depression is imminent, economic growth will resume sooner than later, lifting corporate earnings and many stocks as well.
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But Wall Street makes its money selling stocks, so a bullish brokerage investment strategist isn’t exactly a rarity.
For most people, it’s reasonable to at least ask whether Nasdaq’s collapse could be prelude to something even more painful.
Comparisons to the wild market of the 1920s are inevitable. So, too, are comparisons to Japan’s bull market of the 1980s, the last time (pre-Nasdaq) that stock valuations were pushed to such outrageous levels.
The fallout from those bubbles, and others, was longer-lasting than many people expected early on.
If corporate earnings overall this year decline by far more than is expected, many stocks that now appear reasonably valued will look expensive. This isn’t 1995, when many blue chip stocks (and even some tech issues) sold for price-to-earnings ratios of 10 to 15. Today, the average S&P; 500 stock is priced at about 21 times expected 2001 earnings--and those expectations may be too high.
Indeed, the question of valuation still dogs the tech sector, in particular, even as the stocks have plummeted. The slump in orders this year has reminded investors that tech remains a cyclical business. In the early-1990s, concern over that cyclical risk limited the stocks’ valuations. Intel Corp. shares, for example, had an average annual price-to-earnings ratio of about 12 in the early 1990s.
Today, Intel’s shares are priced at 28 times the company’s expected 2001 earnings per share. If investors decide once again that Intel’s cyclical risk is too high, the P/E will come down--and the quickest way is to cut the stock price.
Now, a key argument of recent years for why stock valuations in general will remain high is that investors don’t have a great alternative to stocks. Bulls say people will stay in the market, or come back to it quickly, because returns on bonds, money market funds, gold and other options aren’t attractive enough to justify staying away from stocks, despite their risk.
It’s a decent argument. But as Japan’s experience has shown, if the stock market becomes too scary a place, investors will leave it, and they won’t come back.
U.S. stocks, as measured by the S&P; 500, have produced an average annualized return of 13.5% over the last four years. But with their dive of the last year, the two-year annualized return is just 1.3%.
If Nasdaq’s plunge is signaling a long trying period for stocks in general, investors’ staying power is about to be put to its greatest test.
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Tom Petruno can be reached at tom.petruno@latimes.com.
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Aftermath of a Bubble: One Year After Nasdaq’s Peak
A year ago March 10, the technology-dominated Nasdaq composite stock index peaked at 5,048.62, then began a stunning decline that may still not have run its course. The effects of the Nasdaq plunge have been widespread, but the stock market as a whole has weathered it remarkably well, some analysts say. Even so, many investors have made only modest money in stocks over the last three years--and virtually nothing over the last two years.
For tech, the crash continues
Pacific Stock Exchange index of 100 major technology stocks, monthly closes and latest:
Friday close: 754.36, --40% from its peak
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... leaving Nasdaq near a record loss ...
Biggest declines in the Nasdaq composite index since its creation in 1971:
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... and throttling the IPO market.
Dollars raised in U.S. initial public stock offerings, annual totals and year-to-date total, in billions:
2001 year to date: $3.3 billion
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Despite Nasdaq, the Broad Market Hasn’t Collapsed ...
Percentage declines in key indexes from their peaks of the last year:
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... But Investors’ Returns Are Dwindling
Standard & Poor’s 500 index, monthly closes and latest:
Friday close: 1,234.18
S&P; 500 annualized returns through Feb. 28:
Last four years: +13.5%
Last three years: +7.1
Last two years: +1.3
Last year: --8.2
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Sources: Bloomberg News, InvesTech Research, Securities Data/Thomson Financial, Times research
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Tech P/Es: Is the Past Prologue?
Over the last year, investors have beaten technology stocks relentlessly lower. But shares of Intel, the leading semiconductor maker, still are valued at 28 times this year’s expected earnings per share. In the early 1990s, when tech was viewed as a boom-and-bust business, the price-to-earnings (P/E) ratios of the stocks were far lower, on average.
2000: 28*
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Intel shares’ average annual P/E ratio
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* Based on Friday’s share price and analysts’ consensus earnings estimate of $1.05 for 2001
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Sources: Value Line Investment Survey, IBES/Thomson Financial, Bloomberg News (BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Still No Shortage of Bulls
Here’s a look at how major brokerages currently recommend that clients divide their investment portfolios. Shown are each firm’s recommended asset weightings for stocks, bonds and cash (money market) or other securities. Also shown are each firm’s target prices for the Dow Jones industrial average and the Standard & Poor’s 500 at year’s end. Each firm believes the market will finish sharply higher this year--which explains the average recommended stock weighting of 68%.
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Cash/ Year-end target: Firm Stocks Bonds other Dow ABN AMRO 60% 20% 20% NA A.G. Edwards 70 30 0 13,000 BancAmerica 60 35 5 11,500* Bear Stearns 65 30 5 13,200 CIBC 55 35 10 12,500 CS First Boston 90 0 10 12,000 Deutsche Banc 70 30 0 11,600 First Union 70 25 5 13,000 Goldman Sachs 65 27 8 13,000 J.P. Morgan 60 20 20 NA Lehman Bros. 80 20 0 12,500 Merrill Lynch 65 30 5 NA Morgan Stanley 80 20 0 12,750 Prudential 70 5 25 NA Salomon SB 65 30 5 12,000 UBS Warburg 64 20 16 NA Averages 68 23 7 12,459 Current indexes 10,466 1,234
Year-end target: Firm S&P; 500 ABN AMRO 1,425 A.G. Edwards 1,600 BancAmerica 1,525* Bear Stearns 1,650 CIBC 1,625 CS First Boston 1,520 Deutsche Banc 1,496 First Union 1,550 Goldman Sachs 1,650 J.P. Morgan 1,400 Lehman Bros. 1,600 Merrill Lynch 1,625 Morgan Stanley 1,600 Prudential NA Salomon SB 1,450 UBS Warburg 1,715 Averages 1,562 Current indexes
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* 12-month targets
NA: not available (firm doesn’t give a target)
Source: Bloomberg News
