Slump in Tech Stocks Appears to Be Going From Bad to Worse

Wall Street marked the one-year anniversary Friday of technology stocks’ peak with another brutal sell-off amid fears that the business slowdown in the tech sector is rapidly deepening.

The Nasdaq composite index, which a year ago had reached its all-time high of 5,048.62 as frenzied buying sent tech stocks soaring, plunged 115.95 points, or 5.4%, to 2,052.78 Friday, a level last seen in December 1998.

Other key indexes, including the Dow Jones industrial average, also were hammered. The Dow slumped 213.63 points, or 2%, to 10,644.62, hurt primarily by its tech members, including Intel Corp. and IBM Corp.

The stock market also reacted badly to the government’s stronger-than-expected February employment report, which raised concerns that the Federal Reserve may not feel compelled to cut interest rates significantly.

But analysts said the driving force behind Friday’s sell-off was mounting worry that orders for high-technology equipment are weakening at a much faster pace than investors had expected.

The latest blow came late Thursday, when computer chip giant Intel said its first-quarter sales would be well below already-lowered expectations.

Later Friday, Cisco Systems, the primary supplier of computer networking equipment, announced it will cut jobs because it sees “early signs” that the U.S. tech slowdown is spreading overseas.

Though their stocks have already crumbled over the last year, they fell sharply again Friday. Intel plummeted $3.81 to $29.44, while Cisco slumped $2.19 to $20.63.

Their declines left Nasdaq’s loss from its peak a year ago at an astonishing 59.3%, nearly eclipsing the index’s worst decline ever, a 59.9% drop in 1973-74.

“The bottom line is you are in a major bear market for technology, and it hasn’t gotten any better,” said Gary Kaltbaum, a market analyst for First Union Securities.

That the slump has now gone on for a year, and has reduced many stocks to fractions of their former prices, has stunned novice and experienced investors alike.

Only 12 months ago, “the market,” and investing in technology stocks in particular, was giddy fun and the talk of many Americans at office water coolers, dinner parties and in Internet chat rooms.

Rocketing stock prices enriched everyone from Wall Street pros to amateur “day traders,” from executives and other employees with stock options to countless consumers who watched their mutual funds and 401(k) retirement accounts soar in value.

Profiting from tech stocks, especially, seemed effortless as companies such as Cisco, Intel, Sun Microsystems and others repeatedly posted sterling earning gains amid surging equipment orders. Their stocks zoomed.

Even stocks of fledgling Internet firms with no profits rose to the stratosphere amid wild hype over their growth potential in the “new economy.”

Then a year ago it all started to evaporate.

While analysts say no single event triggered the demise of the tech bubble, a root cause was simply that the U.S. economy, which had been expanding at a sharp clip, began to decelerate in the wake of repeated Federal Reserve interest rate hikes. Consumers’ confidence also began to wane.

That, in turn, prompted businesses to start cutting back orders for the equipment and services sold by Nasdaq’s marquee tech companies and other suppliers.

Suddenly, investors faced the cold realization that what they had paid for those stocks no longer seemed justified by the companies’ outlooks. That realization began to hit home last spring. But it wasn’t until last fall that investors began to give up on the stocks in droves.

This year, after a rebound in January, tech stocks plunged again in February as warnings on earnings from major companies have swamped the market.

“Investor confidence seems to have been corroding much more rapidly than expected,” said Alan Ackerman, chief market analyst at the investment firm Fahnestock & Co.

The Fed has been worried enough about the slowing economy and sinking stock prices to cut interest rates twice this year.

But hopes for a third cut appeared to dim Friday in the wake of the employment report. Because many tech stock owners had been counting on lower interest rates to offset the bad news of the industry slowdown, Friday’s upbeat employment news was a bitter pill for Nasdaq.

Friday’s market pullback resurrected fears among some traders that, if the Nasdaq index’s loss deepens below the 60% mark--and if the blue-chip Standard & Poor’s 500 index falls officially into bear market territory--investors will feel even more anxious to exit the market.

The S&P; 500 fell 2.5% to 1,233.42 Friday, leaving it 19.3% below its record high reached last March 24--and thus again placing it in danger of the 20% drop that many Wall Streeters define as entering a bear market.

But some market pros cautioned investors against becoming overcome with fear.

“People should forget about measuring how much prices are down from their highs, which represented silly prices; they were much too high to begin with,” said Thomas McManus, market strategist at Banc of America Securities in New York.

“By equating value with how much a stock is down from the highest price it’s ever traded at is absurd,” he said.

Tim Morris, chief investment officer at Bessemer Trust Co. in New York, likewise said the tech-led declines in the Nasdaq and S&P; 500 indexes “are not representative of the economy as such.”

“While these demarcations of 20% declines and that sort of thing make for interesting reading, they’re no more meaningful than any other number,” Morris said. “You have many other [economic] sectors that are doing quite nicely, not the least of which is the housing sector.”

And though some argue that many of the big tech stocks are still overpriced relative to their profit outlook, overall many individual investors are in danger of making a classic mistake if they eschew stocks altogether now, said Alan Skrainka, chief market strategist at brokerage Edward D. Jones & Co. in St. Louis.

“That’s why most investors don’t do well in the stock market, because they go with the crowd” instead of “looking for good news when everything around them looks negative,” he said.

The good news, he said, is that the Fed’s cuts in lending rates are likely to be joined by a major federal tax cut this year, and “both those moves will get this economy back on track.”

And there’s a psychological aspect to consider that many investors forget. “Major bull markets almost always begin when everything around you looks bad,” Skrainka said.

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Times wire services contributed to this story.