Nasdaq pierces 5,000; Dow plummets 374

Although it ended with a loss, the Nasdaq index pierced the 5,000 level early today as investors continued to favor technology stocks. At the close of trading, the Nasdaq was down 57.01 to 4,847.84.

The Dow, meanwhile, sank 374.47 to close at 9,796.03.

For most of the day, the Nasdaq was in positive territory while the Dow was solidly in the red--divergent paths that encapsulate a long-running trend on Wall Street.

The Nasdaq's initial rise today was fueled by a surge in the shares of Network Solutions, which soared $46.75 to $407.38 on news that it will be acquired by security software maker VeriSign. Network Solutions, a registrar of Net names, was founded in 1979.

Meanwhile, the Dow was pounded by a profit warning from Procter & Gamble. Shares in the consumer products giant, which traces its history as far back as 1837, plunged $27.19, or more than 30 percent, to $60.25.

Today's milestone is the latest example of the blistering pace the Nasdaq has been on for the past couple of years.

When it was created in 1971, the Nasdaq had a value of 100. It took 24 years to pass the 1,000 mark, when it closed at 1,005.89 in July 1995.

Another three years passed before it reached 2,000. But in 1999 alone, the Nasdaq hit two milestones: the 3,000 mark in early November and 4,000 in December. The Nasdaq gained a record-breaking 86 percent in 1999, more than triple the gains of the Dow and Standard & Poor's 500 index.

"It doesn't surprise me that the Nasdaq has outperformed (the other indexes), but I'm astounded by the degree to which it has outperformed," said John Ryding, senior economist for Bear Sterns.

"The fact there is such a divergence between the Nasdaq, which is mostly technology stocks, and the Dow, which is represented more by old-economy stocks, is also surprising," Ryding said. "What's been overdone is the degree to which (investors) have beaten down old-economy stocks."

In a move that could be described as catching a tiger by the tail, the editors of The Wall Street Journal, who choose the 30 stocks in the Dow, last October said they would include the Nasdaq-listed shares of Intel and Microsoft. But even that move has failed to provide much of a spark.

Since the announcement, the Dow is down nearly 5 percent (it was virtually unchanged until today's steep drop), while the Nasdaq has surged about 75 percent. Individually, Intel has gained nearly 65 percent; Microsoft has gained about 3 percent.

Informed investing or recklessness?
The Nasdaq's sharp ascent has some analysts worried that investors are blindly pouring money into stocks.

Bill Meehan, chief market analyst at Cantor Fitzgerald, said investors are ignoring the history of speculative bubbles and placing their faith in the "new economy."

"There's a speculative mania out there for the belief that this time is different," Meehan said.

The lofty perch is "sustainable until people no longer plow money into biotech funds, technology funds, S&P funds and others," he added. "Right now, nobody cares about the price (of stocks)."

That concern was echoed by George Mairs, president of Mairs & Power, whose firm manages $1.2 billion. "I think we probably haven't seen a time with a greater dispersion between high-multiple stocks and the rest of the market," he said. "There's been a frenzy going on, and this is a source of concern. You have enormous valuation to a number of untested companies."

The Nasdaq has been able to extend last year's record-setting year despite some strong headwinds.

The year started on a sour note, when the Nasdaq fell 229.66, or 5.56 percent, to close at 3,901.49 on Jan. 4. In terms of points lost, the plunge was the worst in the Nasdaq's 29-year history.

Alan Greenspan, the powerful chairman of the Federal Reserve, also has sounded repeated warnings about the roaring economy and stock markets.

Speaking at a financial conference sponsored by Boston College, Greenspan yesterday repeated his concerns that the economy is growing too rapidly given the dwindling supply of new workers and the increasing need to rely on imported goods.

"Overall demand for goods and services cannot chronically exceed the underlying growth rate of supply," Greenspan said. "The expansion of demand must moderate."

To reduce demand, the Fed has wielded its primary weapon--control over short-term interest rates--four times since June. The latest increase, a quarter-point boost on Feb. 2, left the federal funds rate at 5.75 percent.

Many stock analysts and economists expect the Fed to raise rates again when it next meets March 21, and possibly again May 16. Greenspan's speech reinforced that proposition.

"We're probably in a dangerous period right now," Cantor Fitzgerald's Meehan said. "The Fed has made it clear that it will raise interest rates until the economy cools down, and that won't happen until the stock market does."

Ironically, however, rising interest rates could add fuel to the Nasdaq fire.

"Technology stocks are relatively impervious to interest rates," said Bear Stearns' Ryding. The reason: "Many companies don't have much debt, and they can raise capital through equity markets and venture capital."

News.com's Jim Hu contributed to this report.