Why April 4 was good for the market
- Tuesday, April 11, 2000
Reprinted with permission from World Finance Net IPO Newsletter, written by Alexander Frauenfeld
It was the most volatile day in the history of the stock market. Both the DOW and the Nasdaq plummeted more than 500 points before staging a remarkable recovery. Thousands of margin calls went out around the country and the world. Accounts were closed out. Greenhorn investors who had made thousands in a few months saw their reward wiped out in a matter of a few hours. Even veteran investors, who were coming to believe that Wall Street had signs pointing in one direction, up, were stunned. Is this just the beginning of a major market shakeout? Is the party over?
Clearly the answer is no. April 4 was a day that crystallized the transformation in leadership of the bull market that had begun three weeks earlier. It is not so much a change from New Economy stocks to Old Economy stocks; rather, it is a flight to quality across the entire equity field.
Just take a look at the numbers. From March 10, the day the tech-heavy Nasdaq peaked, through April 5, that index has fallen close to 18%. Even more breathtaking was the plunge in some of the Internet indices, which dumped around 35% during the same period. Still, tech leaders like Cisco Systems (CSCO), Dell Computer (DELL), and Intel (INTC) have continued to rise. Also, the blue-chip DOW has risen 11.1% with stocks like Eastman Kodak (EK), Procter & Gamble (PG), and Citigroup (C) posting very solid gains.
Call it the start of something new or whatever you want. The bottom line is that it can only be healthy for the market. For the last year and a half, the stock market has become a market of extremes: extremely high valuations for the New Economy stocks that dominate the Nasdaq, and extremely low valuations for anything that smacked of the Old Economy.
What is really going on here is a massive shift in investor psychology and a dramatic reevaluation of companies with lots of nifty ideas and great potential but not much else. Old Economy giants are winning new respect from investors, while New Economy darlings are losing some of their luster. Investors did not abandon tech stocks altogether, but they definitely switched from companies on the verge to companies that have arrived. The fast-money crowd may need a break. The markets will be less forgiving, particularly in the Internet sector. Finally, cash-producing business models appear to matter to investors.
This shift, though painful for many investors, especially those who had bought tech stocks on margin hoping the surge would continue, should ultimately turn out to be beneficial for the stock market as a whole. For one thing, many institutional investors have been on the sidelines, waiting for signs of life in quality value stocks. That means more money, rather than less, could be flowing into the market in the near future.
Indeed, the economy remains robust. The most recent figures show that consumer spending, manufacturing, production, and productivity are strong. Inflation is still modest and energy prices, which were getting scary a few weeks ago, have moderated.
Perhaps the most important factor that will help market stability as well as investor confidence is strong corporate profits. The first-quarter earnings reports will start coming in within days, and the outlook is excellent. According to I/B/E/S, the earnings research firm, it will be another record-breaking quarter for profits. That includes the tech sector, which is projected to grow nearly 35% over the first quarter last year. And analysts have raised their Year 2000 earnings estimate for companies in the Standard & Poor's 500-stock index to 17.9% from 17.2%, according to First Call Corp., another earnings research firm.
The bull market does not end here. We think the economic and profit expansion will continue.
Although record trading volume and volatility may cause investor jitters, that can be a bullish indicator. The volatility of April 4 could indicate a market bottom, meaning that the worst is behind us. The good news is that the speculation has pulled back. And in the long run, that makes for a much safer, less volatile market.
Moreover, the DOW and the Nasdaq are now on more equal footing, with the DOW Down 3% for the year and the Nasdaq up 2%. What had been a divergent market now has both indices moving the same way, and trending higher.
There is no guarantee that the move to quality alone will send the market to new highs. But at least it will be able to climb on more solid ground.
Click here for this week's IPO analysis and additional investment research from World Finance Net.
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