Less than a month into 2001, the Nasdaq Composite Index has jumped 11.6% from last year's close of 2470. It's up just above 20% from its bottom of (2291) on Jan. 2. That's a year's worth of solid returns for any index in three weeks; is this for real?
We talked to
Brian Rauscher, a U.S. investment strategist at
Morgan Stanley Dean Witter, about whether the newly buoyant Nazz will stick around, and what's behind its rise.
TSC: Do you think what we've seen so far in the Nasdaq is sustainable?
Rauscher: We do think so for the next three- to six-month period. I think we'll probably test the 3000 level, and then we're probably going to see some resistance.
TSC: That's interesting -- we could see things cool down around the second half, when some people think the economy could start to look better?
Rauscher: Some of these stocks are going to rally on lower interest rates, but as a number drift lower and they have tough comparisons around midyear, there could be a tendency to pull back and consolidate a little. Remember, these stocks are not going to go straight up from here.
But we do think the index as a whole has begun a period of outperformance. It's just not going to be a clean path straight up from here.
TSC: How do you explain why the Nasdaq's doing so well this year? You've had a lot of companies with earnings disappointments, so this doesn't seems like a response to fundamentals.
Rauscher: You had the
Fed easing, so that helped things out a little bit. You're still having down earnings and downward revisions, but these announcements are pretty much in the price.
There's a give-and-take going on now between lower interest rates from the Federal Reserve and lower earnings. A lot of Nazz stocks going down 20%, 30%, 40% have discounted quite a bit of slowing going forward. Some stocks too much, some not enough. That's going to be the trick going forward.
TSC: Still, it seems like we could keep seeing more earnings or revenue disappointments down the road.
Rauscher: I do think in the tech space, the number should continue to drift lower, probably as we go to the middle of the year. Just to give you some perspective, at of the end of July 2000, earnings in the tech sector of the
S&P 500 were projected to grow 25% in calendar year '01. And that number today is down to 5%. So you can see that those numbers have been cut quite dramatically.
Now a lot of that is in the price. Though I'm not going to say that's [true] for every stock.
TSC: So how will the market react to the next rate cuts? Will it react at all? Or do you think those are already priced in?
Rauscher: It's going to be kind of a give-and-take depending on the economy. Once [more rate-cutting] starts, people are really going to be into evaluating what the economy's doing. Bad news in the economy will translate into good news for the markets, because if the economy looks weaker, then it's more likely you'll get a more aggressive Fed easing. That would then contribute to a more powerful snapback.
TSC: What factors are you monitoring closely in terms of the economy?
Rauscher: Consumer confidence, retail sales numbers. And business investment spending numbers are coming off. That's what's been driving the economy a lot, consumer spending and capital investments.
TSC: Right now how would you characterize what you see?
Rauscher: The consumer confidence number [released last week] was a very weak number, one of the five biggest declines we've seen on record. So it's fallen quite substantially, but it's still above recessionary levels we've seen in the past. With interest rates coming down and consumers beginning to refinance mortgages and hopefully seeing the economy looking like it's picking up, the numbers will [maybe] pick up.
TSC: And business spending would follow? Rauscher: That's right.
TSC: So what would you tell individual investors at this point? Should they get into the market or stay out, since you expect a pullback later in the year? Rauscher: We do think the Nasdaq and the S&P are going to rally from here. We think there are some gains that could be had in the market. We do think investors should be shifting their portfolios in these Fed easing periods, since [historically] stocks outperform bonds, aggressive outperforms defensive and growth outperforms value. So we think investors should begin to shift their portfolios in this direction.
Over the last three weeks, we've already had poor performance in utilities, health care and energy, so part of this shift is already going on.
TSC: So basically, investors should not necessarily try to go into stuff that worked well last year. They should be aware this could be a new market, or already is a new market.
Rauscher: That's correct. And some of the areas we like would be information technology, telecom, retailers and noninsurance financials.
TSC: What do you like within IT?
Rauscher: We think there's probably going to be a two-phase cycle. Historically, what's happened is in the first two to six months [of a Fed easing] is that software and some of the value names have been part of the technology area that have been strong performers. In the second part of the Fed easing cycle, six to 12 months, the more economically sensitive areas outperform, like semiconductors and infrastructure.
TSC: What do you mean when you say value names, within IT?
Rauscher: Stuff like the larger boxmakers. One of the big boxmakers --
Dell(DELL Quote - Cramer on DELL - Stock Picks) --
preannounced negative earnings, and the stock didn't get hit. That means a lot of the bad news is already priced into that name.
TSC: As far as technology goes, how do you explain the performance this year of some of the Internet names? You've got
eBay(EBAY Quote - Cramer on EBAY - Stock Picks) up about 52%,
Amazon(AMZN Quote - Cramer on AMZN - Stock Picks)(AMZN Quote - Cramer on AMZN - Stock Picks) is up 28%.
Rauscher: Just as these stocks get overvalued and overshoot to the upside, the same thing can happen on the downside. If they get pushed down far enough, you're bound to get a bounce on any [information] that's either less negative or slightly positive. Some of the dot-coms that had dropped even further went up 40% and 50%. It was obviously tax-loss selling that pushed a lot of the names pretty far down toward the end of the year.
TSC: What would you tell investors about that area?
Rauscher: I would think the average investor would want to stay out of the dot-com market. The dot-com space is still a pretty risky part of the market. Depending on your risk tolerance, there are some good companies that could go up, but you would have to be more out on the risk curve.
K.C. Swanson
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