Rocky Nasdaq ride leaves investors guessing

As the Nasdaq composite falls below the 2,000-point threshold for the first time since December 1998, investors are asking themselves whether the worst is yet to come.

4 min read
Investors continued to dump technology stocks Monday, sending the Nasdaq composite index below the 2,000-point threshold for the first time since December 1998.

At the close of regular trading, the Dow Jones industrial average was off 436.37 to 10,208.25, its worst point decline this year. The Nasdaq tumbled 129.19 to 1,923.59.

Cisco Systems was one of the catalysts for Monday's sell-off. Long considered the crown jewel of the technology sector, the company announced Friday it would lay off up to 8,000 employees. In addition, the company predicted that the economic slowdown will haunt its sales and earnings into 2002.

Cisco was just the latest in a string of tech companies to spook investors. Before Cisco, it was Oracle. And before Oracle, it was Intel, whose warning came after the entire PC sector also warned of poor sales and earnings growth in 2001.

The magnitude of the Nasdaq collapse is staggering, considering the index was trading above the 5,000-point level this time last year. Since March 10, 2000, the tech-heavy index has plunged 62 percent, cutting into the personal portfolios and retirement plans of millions of Americans.

All the paper wealth accumulated in the Nasdaq between December 1998 and its peak--roughly $3.6 trillion, according to analysts--has evaporated in a scant 12 months. And there is little evidence that a bottom is near.

"A year ago all the mistakes that were made by analysts and investors were on the positive side," said Tad LaFountain, an analyst at Needham. "Now the mistakes being made are on the negative side. What's interesting is if you look at the revenue and sales estimates for these tech stocks, it looks like people confused 2000 with 2001."

Throughout fiscal 2000, technology companies of all stripes and colors were posting staggering sales and earnings growth from what was already an incredibly high level established in 1999. Orders for the latest flash-memory chips, network equipment, and wireless telecommunications gizmos far outstripped demand. see Special Report: Assessing the carnage

With technology stocks trading at sky-high valuations and technology products saturating the market, analysts had little choice but to continue to raise estimates and maintain positive outlooks on these stocks.

"You also had an entire population of mutual fund managers driven to improve their performance without the hindrance of experiencing a downturn," LaFountain said.

Clearly investors and the companies they invested in didn't know how good they had it back in that wildly optimistic period when the Internet was coming of age and venture capitalists were compelled to back anything that might have even the slightest chance of becoming the next Yahoo or Amazon.com.

What a difference a year makes
Back in March 2000, when the Nasdaq first eclipsed the 5,000 mark, Yahoo shares were trading at $183.25 fresh off a 2-for-1 stock split. CMGI, which built its name mostly on the backs of money-losing dot-coms, was perched at $144.63. Those stocks now trade at $17.25 and $3.25 a share, respectively.

But this capitulation isn't confined to the dot-com universe.

Cisco shares, which traded at $139.63, are now going for $19 a share. Intel, now at $28.25, had moved up to $118.38, and Microsoft, currently going for $52.94, was considered "cheap" at $100 a share. Lucent Technologies, now hovering around $12 a share, was trading at $68.88.

Inflation remained in check, while productivity skyrocketed as all this new technology found its way into offices and factories around the world.

With amateur investors opening up online brokerage accounts in record numbers and 401(k) contributions at a fevered pitch, Federal Reserve Chairman Alan Greenspan did his best to curb this "irrational exuberance" by steadily increasing short-term interest rates six times in an 18-month period.

The market shrugged off these increases, making it impossible for the Fed or individual investors to accurately gauge the affect of such a severe shift in the nation's monetary policy.

Once the predictable inventory glut hit the technology sector, these rate hikes began to affect the economy at a time when it could least afford it.

Greenspan did his best to rectify the situation in the first five weeks of the year by cutting rates by a full point. Most analysts are convinced that at least another quarter-point reduction looms for later this month.

Meanwhile, consumer confidence began to crumble as many of the companies that were placing orders in 1999 and 2000 either went bankrupt or canceled orders altogether.

Nasdaq declines fan out
Now that the Nasdaq has lost more than 60 percent of its value in the past year, its woes are starting to spread to more conservative investments.

"Some say we've finally hit a bottom, but I'm not in that camp," said Joseph Barthel, chief investment strategist at Fahnestock. "In fact, we're starting to see this weakness spill over into the S&P 500. That really opens up the possibility for a greater decline ahead."

The Standard & Poor's 500 fell below 1,200 points Monday, down 23 percent from its peak of 1,553 set last March.

Barthel said that while the monetary policy has improved, and stocks have been terribly oversold in recent months, the market still lacks an improved investor sentiment that is necessary before any significant recovery can begin.

Analysts universally agree it's all but impossible to call the absolute bottom during a correction of this magnitude.

But when investors do regain confidence in the economy and these technology companies, the game begins anew.

"When this temporary mismatch between demand and supply growth is corrected, the recovery will be instantaneous and ferocious," LaFountain said. "There will be no lag from companies waiting to lay new fiber or build new manufacturing plants. Everything will be in place for a major rally."