There is nothing new in saying that the
Dow Jones Industrial Average
has been in trouble. Loaded with old-economy components, it is representative of the wide swath of American companies whose stocks have suffered for the last half-year and more.
But the Dow's drop below 10,000
Friday, to its lowest close since April 6, brings home the trouble with the U.S. stock market. Although technology stocks continue to put in strong performances, most other sectors have done woefully. Drugs, banks, consumer cyclicals -- all are at levels not seen since the market got taken apart in October 1998.
And 10,000 does other things, too. Big round numbers can carry psychological importance in the market, and that the index bounced off this one last fall brings more weight to it. As does commentators' constant carping on it (including this right here).
Funny, considering how easily the Dow blew through 10K last spring.
"We forgot to give 10,000 its due attention on the way up, so now it's demanding attention on the way down," said John Bollinger, president of
. "These milestones, they always assert undue influence. And the Dow, despite its denigration by many analysts, is still the stock market for most of the people in America."
It may be that the way the Dow fell through 10,000 Friday portends a turn in the market. There was a feeling of capitulation in the selloff, and that sometimes signals a reversal. If the market is not scared yet, a little time with a four-digit handle may awaken a little fear, setting stocks up for a rebound.
Whether that happens is question No. 1 for the coming week. Question No. 2 is whether tech can continue to perform well despite the rest of the market having fallen apart around it. Rightly or wrongly, the idea that tech is well insulated from the effects of further rate cuts has caught hold on Wall Street. The Dow is more than 14% down on the year. The
Nasdaq Composite Index
is up nearly 13%, having touched a new high
Thursday. Not everyone thinks that divergence can continue much longer.
"The risk is that to the extent the
engineers a slowdown, maybe the technology sector's customer base slows, and thereby tech revenues begin to feel the pinch," said Tom Van Leuven, stock strategist at
That thought is at odds with what seems like the market consensus, which reckons companies will need to continue to invest heavily in tech to remain competitive -- never mind the bottom line. Perhaps that's true, but only up to a point -- at some point rate hikes will force companies to cut even tech spending. Whether the Fed will end up raising rates that much, however, will depend a lot on whether the economy begins to cool off a bit. And whether the economy starts cooling off? That may depend a lot on whether tech stocks, whose surge has helped spur consumer confidence, slow down.
"The stock market plays a big role here," said Josh Feinman, chief economist
Deutsche Asset Management Americas
. "It is likely to take some combination of higher interest rates and a cooler stock market to control the economy."
There's little doubt that the economy continues to move at a pace too quick for the Fed's liking, and that rates will be raised another quarter-point when the
Federal Open Market Committee
meets again in March. And the economic data due out in the coming week seem unlikely to do anything to detract from that sense. The big reports will be the February
Purchasing Managers' Index
on Wednesday and, most important, the February
"I think that the underlying trend is that the economy has a lot of momentum," said Feinman. "Everything is still looking very, very strong. You have to think the Fed is tilted toward tightening for the foreseeable future."