Soaring stock market returns from 1995 to 1999 were driven by investors made giddy by two big things. The past year's tech stock swoon stems partly from disappointment over a third.
The clearance sale on the Nasdaq proceeds. Even with a springtime flutter, the index is off 58 percent from its March 2000 high. A glimpse back reveals the roots of our current dilemma.
For five years--1995 through 1999--returns were phenomenal. The S&P 500 rose 26 percent annually while the Nasdaq vaulted over 40 percent per year. Two big things ignited market enthusiasm. The first was Windows 95, which brought pockets of resistance to the PC revolution to unconditional surrender. This event, whose importance was missed by traditionalists who slept through it and techies who laughed at it, boldly lifted consumer interest in computers and corporate information technology spending to where they had never gone before.
And then came big event No. 2: the browser war. The bloody software combat made some gawkers--including those at the U.S. Department of Justice's Antitrust Division--see red. But the struggle between Netscape's Navigator and Microsoft's Internet Explorer created hundreds of millions of web surfers. In 1993, only early adopters of the Web had browsers. In 1996 you couldn't buy a PC without one. A mass market for e-commerce materialized, fueling investor enthusiasm for applications, services and "arms merchants" supplying the gold rush.
An expansion unleashed by innovative technologies carries the seeds of its own demise. Investors chase new business plans, knowing that blue-sky returns--early shares in the rising Sun, the forming eBay--are temporarily available. The window will shut, but stopping too soon is as dangerous as investing too long. Millions brave injury to spin this wheel of fortune.
Despite Alan Greenspan's concern about the inflationary aspects of the "wealth effect," Fed policy fed the cycle. Pouring liquidity into the banking system in late 1999 to smooth possible Y2K glitches, it pumped up capital markets just as tech enthusiasm was reaching its zenith. Once the millennium clock struck midnight, monetary policy began to tighten. By March 2000, markets started to clench. Tech stocks went into a free fall with the collapse of settlement talks in the Microsoft antitrust case. On April 3 to April 4, 2000, as the market absorbed a tough anti-Microsoft verdict, the Nasdaq dropped an astounding 20 percent over a day and a half of trading.
Bubbly talk about buying opportunities turned to anxiety over regulatory risk and dot-com burn rates. While telecom infrastructure today leads the market down, this sector withstood the severe tech share shocks early last year. The Nasdaq topped off on March 10, 2000, but Nortel and JDS Uniphase hit all-time highs late last July. Fiber-optics suppliers saw big-time rallies last summer. As if in suspended animation, telecom infrastructure continued to climb a mountain that was already crumbling beneath it.
Waiting for broadband
Investors were holding on for the consensus on the next big thing--broadband. Internet video looks like tomorrow's "killer app." Demand for high-speed connections has been robust, as customers have lined up to pay $40 a month to get 300 to 500kbps Internet hookups from cable or telephone companies.
Yet in late 2000, hopes that broadband would sustain the tech bull-run faded fast and furiously. Regulation of cable modems was threatened by "open access" rules giving outside service providers the right to re-sell high-speed cable lines. While recommended as a policy to advance network development, shares of Internet content and infrastructure providers have not responded positively to news that "open access" rules were moving forward.
Meanwhile, DSL (digital subscriber line) provided by local telecommunications companies and regulated with a far-reaching form of "open access"--hit a financial market air pocket. The modular market structure, forced by regulators to allow independent companies to supply service using monopoly phone lines, produces an uncoordinated, no-one-in-charge service. The top four independent DSL providers each lost over 97 percent of their market capitalization in 2000.