Tech-Led Rebound Defies History
“The last shall be first,” the Bible says. But on Wall Street, that has limited applicability.
It isn’t unusual for out-of-favor stocks eventually to come into favor for a time.
What isn’t supposed to happen, however, is for the leading stock sector of a new bull market to be the same sector that led the way up in the previous bull move, then down in the subsequent bear market.
That’s what is disturbing to many veteran investors -- people who’ve been in the business for decades, not just since 1999 -- about the rally that has powered shares higher since the market hit five-year lows in October.
The best-performing stocks are many of the same technology and, specifically, Internet-related issues that were the ill-fated stars of the last boom.
Irvine-based chip maker Broadcom Corp., for example, rocketed 351% in 1999, then plunged 38% in 2000, 51% in 2001 and 63% last year.
This year, it’s up 85% through Friday, to $27.86. That compares with a 30% rise in the Nasdaq composite index and 13% for the Standard & Poor’s 500 index.
Chinadotcom Corp., a Hong Kong-based e-business firm that trades on Nasdaq, soared from its initial offering price of $5 in 1999 to a peak of $73 in 2000, a gain of 1,360%. So far this year the stock’s percentage rise hasn’t reached four digits, but it’s well into three-digit territory, up 376%, to $13.48, as of Friday.
It’s true that these stocks, and most other tech and Internet names, still are far below their peaks of the last boom. Relative to underlying earnings, however, the stocks’ prices again are in nosebleed territory, though perhaps more the equivalent of camping atop Mt. Shasta than Mt. Everest.
“It’s scary,” said Dan Sullivan, who has been writing the Seal Beach-based Chartist investment letter since 1969. “It looks like a replay: ‘The ‘90s are back.’ It doesn’t make sense.”
It doesn’t make sense because investors are supposed to learn hard lessons after market bubbles burst and destroy the value of the highest-flying stocks. People aren’t supposed to be easily drawn back into making the same mistakes -- at least, not with the same stocks.
“If you got killed in a stock, you’re not going to be emotionally able to buy it again,” said John McGinley, editor of Technical Trends market letter in Wilton, Conn. That’s why stocks that lose, say, 80% or more of their value in bear markets, as so many Internet-related shares did between 1999 and last year, generally don’t zoom again.
“They just don’t repeat. They just don’t,” McGinley said. “Dead dogs don’t get up and run.”
Yet this year, technology clearly is the place to be again. Money has gone chasing after hundreds -- not just a handful -- of tech and Net shares. And the more speculative stocks -- those of smaller companies such as Priceline.com and Juniper Networks Inc. -- have risen far more than the shares of clear survivors such as AOL Time Warner Inc. and Cisco Systems Inc.
The trend isn’t troubling to the market’s most fervent bulls. They note that, historically, when investors have begun to sense that a pickup in the economy was at hand, they usually have favored stocks of smaller firms because those firms often have the most to gain from an acceleration of growth.
History also shows, however, that in new bull markets investors typically have a powerful aversion to whatever hurt them the most in the last bull market.
In the mid- to late-1960s, the nation was ravenous for the hot new growth stocks of that era -- including tech-related companies such as Optical Scanning and University Computing. Investors bid up the shares to stratospheric levels relative to earnings; P/Es of many of the stocks exceeded 200 at their peaks in 1968, according to a Dun’s magazine story in 1971.
Then came the bear market of 1968-70. Like the Net stocks of the last boom, many of the 1960s-era stars would fall more than 80% before bottoming.
Then, as the market recovered in 1971 and 1972, many investors refused to go near the old leaders. Instead, they sought the relative safety of what came to be known as the “Nifty Fifty” -- established, consumer-oriented companies such as Avon Products Inc., McDonald’s Corp. and Walt Disney Co.
The Nifty Fifty bull market also would end badly: Those stocks crashed during 1973-74, driving the blue-chip Standard & Poor’s 500 index down 48% from peak to trough.
Investors’ preference then shifted back to smaller companies. From 1976 through 1983, the Nasdaq composite index -- back then viewed more as a small-stock index than a tech-dominated one -- outperformed the S&P; 500 every year.
The market’s shifts in the 1960s and 1970s may seem like ancient history (depending on your age, it may be), but veteran investors look to those periods for comparisons because of the similarities to the wild boom and bust of the last eight years.
That’s why the rebound in tech and Internet names this year stands out: It isn’t following the script. Human nature isn’t supposed to change. People are supposed to be too angry and distrustful to take a flyer with stocks like these.
How, then, to explain tech’s stunning comeback? Here are three possibilities:
* This is a new bull market, but it’s early into the turn, and many tech stocks are merely snapping back after being pummeled for three years. It won’t last for them, but other stock sectors soon will take over.
Part of the reason for the surge in tech is “short covering” -- buying by bearish investors who had borrowed stock and sold it, betting on lower prices. Once the stocks began to rebound some of the short sellers rushed to close out their bets by repurchasing the shares. That has helped stoke the rally.
C. Kim Goodwin, chief investment officer for equities at State Street Research and Management in Boston, believes the market has entered a new bull phase. But looking out 18 months or so, “Will tech be far and away the market leader? I doubt it,” she said.
* The rally this year is just another short-term bounce in a continuing bear market. The gains in the tech sector show that investors still are clinging to the old leaders -- and until they give up on them for good, the market overall can’t bottom.
This is McGinley’s view. The tech rally, he said, is largely the work of short coverers, hedge funds and other short-term “momentum” investors, and “idiots who are hoping against hope” for their old-favorite stocks.
* This may or may not be a new bull market, but it won’t matter for some tech companies: Tech has become such a huge part of the modern economy that it’s silly to imagine investors forsaking the sector as a whole.
Perhaps too many of the stocks have rallied this year without fundamental justification, but over the next few years a significant number of the companies will thrive, and so will their stocks -- whether a new bull market is afoot or not.
Look at biotech giant Amgen Inc., tech bulls say: It was a market leader in four periods between 1983 and 1999. It kept coming back because its outlook kept getting better.
What about those nosebleed price-to-earnings ratios in tech again? At least many of the surviving tech and Net firms have earnings now, tech bulls say. Plenty did not in 1999. Wall Street always pays high P/Es for true growth stocks, and that’s what many tech issues are, they say.
The problem with this view is that true long-term growth stocks are the exception, not the rule. To say “this time is different” is tempting the market gods to unleash a new round of havoc.
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Tom Petruno can be reached at tom.petruno@latimes.com.
