The Nasdaq exited 2000 with the nastiest performance in its 29-year history, tumbling 39 per cent on the year and down more than 50 per cent from its March highs.
Meanwhile, the Dow and the S&P 500 also lost ground, declining six per cent and 10 per cent for the year, respectively. A slowing economy, high oil prices, interest-rate hikes and unrealistic expectations all worked together to make 2000 one of the worst years in recent history.
Although the economy is slowing down, we expect 2001 to be a much better year, particularly for technology. In an effort to avoid a serious downturn in the economy, the U.S. Federal Reserve last week cut interest rates by 0.5 per cent. Just too much has happened for the Fed to watch from the sidelines.
Consumer confidence is at an all-time low, manufacturing continues to slow and this past December demonstrated a dramatic downturn in retail sales both on and off the Internet. Although lower interest rates make it cheaper for businesses to borrow money to buy computers and software, for now the benefits are mainly psychological.
This may be a simplistic look at the situation, but the point is valid.
The biggest change between then and now is sentiment. Investors over-reacted on the upside last year and overbought the market. I think we have gone completely the other way. Here’s a little piece of advice — don’t fall into the trap of extrapolating current sentiment at the expense of fundamental analysis.
Only 12 months ago, the prediction of growth was the only prerequisite for investors to get excited about a story. The slightest whisper of an association with the Internet drove stocks through the roof. Analysts even developed new metrics to measure the potential of growth because sales and earnings were non-existent.
But what is the news? Is the death of Internet startups the end of the world? Is the economy going down the tubes with the dot-coms? Or do we once again have a disconnection between valuation and economic reality?
The panicked state of the market sure makes it feel that way. With the continual erosion of technology stocks, what are investors to hold on to?
Here’s the bad news. The economy is expected to grow at a slower pace this year, raising questions about how earnings will hold up. The tech sector will remain under pressure as companies continue to trim their earnings guidance or provide profit warnings. Worries about overall information-technology spending will still weigh on the market for some time. We expect layoffs and company closures to grab a large share of the headlines in 2001 and we expect market volatility to remain high.
Hey, but this is tech — the news isn’t all bad. And it doesn’t mean investors should avoid technology stocks. Tech spending is slowing, not stopping.
Information technology will play a big role in a slow economy as management changes the focus from revenue growth to cost containment and customer retention. As a result some technology segments will be affected less than others. For example, we believe companies won’t slash spending on software that helps companies manage data.
But investors shouldn’t try to time the market. What they need to do is buy and hold the right tech stocks, the under-appreciated companies that are in the right place at the right time.
If investors want to be technology investors, they have to look beyond the market sentiment and believe in their companies. Technology is now beyond the hype stage for both the investment market and those companies spending money on technology. Management will be even more critical in its assessment of technology, looking for solutions to address real needs and provide real benefits.
Investors need to take the same amount of caution. That is why investors must look beyond the valuation and more toward industry fundamentals and a company’s competitive position.
A sum-of-the-parts analysis ensures that a company can withstand a downturn. A strong balance sheet and The volatility and current negative sentiment in the markets has been painful to watch.
However, I think the interest-rate cut will create a soft landing for the economy, and hopefully lay the foundation for rebuilding investors’ confidence.
With this foundation, we expect technology issues to lead the charge forward.
Although 2000 was a difficult year, it’s important to take a long-term perspective. And over the long term, I can’t think of many other sectors with as much potential as technology.
My guess is that the state of our economy is not as bad as the market sentiment. I predict that demand for technology will again outpace overall economic growth. The bears are only being human when forecasting the end of the world for technology stocks.
Happy New Year.
(Brian Pow is a technology analyst and director of research with Acumen Capital Finance Partners Ltd. Topics discussed in this column are the view of the writer and do not necessarily reflect those of the company.)
