How NASDAQ Became Afraid of the Big Bad Fed

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Once upon a time in March, when the NASDAQ hit its record high of 5048 points, tech investors were seen all over Wall Street's bars and restaurants, hoisting microbrews and declaring they couldn't be bothered with the insipid Fed-watching that had gripped their Old Economy brethren ever since "irrational exuberance." We're betting on the future, they said, and the future is always bright for geeks. Now, two months and a staggering 37 percent later, NASDAQ is the wisp in the Fed's wind. Tuesday, week-old worries about another interest rate raise in the wake of last week's half-percent hike comments hit the Dow for 120 and the NASDAQ for 200 (to 3164, low for the year), a disproportion that is becoming old hat for index watchers.

What's going on? "In March and April, interest rates were going up very gradually, and tech investors figured Greenspan would taper off, because this was an election year," says TIME senior economics reporter Bernard Baumohl. "Now, the inflation picture is getting worse, and Greenspan is getting serious. And they're feeling the effects of higher interest rates."

For investors, tech stocks have always been wobbly, with their stratospheric price-to-earnings ratios and fluid business plans; now they're starting to careen, mostly downward, with regularity, and other bets are only getting better. "The higher interest rates go, the more lucrative bonds and T-bills are," says Baumohl. "When 30-year bond yields get over 7 percent, with absolutely no risk, money gets shifted out of the techs and put elsewhere." And then there are the fundamentals, which were never the tech sector's strong suit anyway. "When rates go up, companies don't have as much money to invest in new technology. That cuts into tech firms' sales, which makes those P/E ratios look even worse." In any case, whenever a Fed chairman can't stop the economy, trouble is definitely in the wind. And now that investors have glimpsed the tech sector's mortality, and read the news articles about venture capitalists turning off the money — and seen venerable Cisco Systems mired in the low 50s — trouble from the Fed is likely to hit the NASDAQ first and hardest for a while. Those techies had better pray that the next batch of economic numbers are tepid enough to get Greenspan's foot off the brake.