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For most of the past few years, investors ignored what was worrisome and considered only good news. That probably kept stocks moving higher for longer than they should have. Now the focus is on negative factors, and that too could go on longer than it should. Front and center is the zaniest election ever. Few believe we're headed for a crisis, but reflecting on the possibility has prompted relentless selling.
Does that make sense? Not on the face of it. But some investors evidently took a second look at what they owned and found a slew of tech stocks that have been sinking since last spring. Worse, even at these new lows the stocks remain priced for perfection in an environment rapidly turning anything but.
The NASDAQ is down 40% from its all-time high and down 26% for the year. The Dow and broader market gauges are down for the year too. With so much damage on the books, it would require superhuman restraint by investors not to greet future rallies with some selling in a bid to get even and get out, or just take some risk off the table.
The Fed didn't help matters on Wednesday, when it left interest rates unchanged, as expected, but then squashed a buoyant market that day by noting that it remains more likely to raise than lower rates in the near future. Economists still expect a rate cut by June. But the Fed added oceans of uncertainty to a market already drowning in it.
The list of what ails Wall Street is long, and not all items are easily dismissed. It's hard to find something great about oil at $30 per bbl., for example. The world is less dependent on oil than it was 20 years ago, and so far the higher costs haven't stoked inflation. But the risk of a severe global slowdown is greater when energy is expensive, and few outside of OPEC, Big Oil and the guy selling home insulation ever gained a lick from rising energy costs.
More worrisome is a broad slowdown in the crucial area of tech spending. It's no secret that tech is the ox that for years has pulled the market higher. Other industries, including retail and autos, are already in profit recessions. Without a vibrant tech sector, there is little to drive overall corporate profits higher.
Barton Biggs, chief global strategist at Morgan Stanley Dean Witter, notes that spending on telecom equipment will be down in 2001, after rising steadily for years. A number of big carriers have already disappointed Wall Street with weak sales of their goods and services. Spending on PCs and by cable systems is falling too, Biggs says. Meanwhile, recent dotcom failures and near failures, from Pets.com to Drkoop.com highlight that industry's capital crunch, which will take a big bite out of revenues at suppliers such as Sun and Oracle; the latter's stock is down more than 40% in three months.