Asymmetrically Awestricken

The jaw-dropping rise of the Nasdaq reflects a growing gulf between the sheep and the goats.
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It is not an easy matter to separate the analytical from the emotional when reacting to big market moves. Right now, my reactions are more on the feeling than the thinking dimension. I'm finding it difficult to think about how this market ended the week; insights of a well-considered kind are elusive. But you don't have to seek out feelings. They come looking for you, and I think I recognize this one. It may be awe.

Look at the

Nasdaq Composite Index

. For stupefying, jaw-dropping, awe-inspiring performance, what else is there to talk about? It is up more than 30% in less than seven weeks. It is up more than 80% in 12 months. It has nearly tripled in three years. This is an index of more than 4,700 members with $4.4 trillion in market cap. The stocks in this index alone have added almost $2 trillion to the wealth of their holders in the past year. With respect bordering upon awe for the durability of his witticism, let me paraphrase Sen.

Everett Dirksen

: A trillion here, a trillion there, pretty soon you're talking real money.

The sweet spot of this latest seven-week moonshot took place in November. During its 21 trading sessions, the Nasdaq registered 15 new highs. Volume surged into uncharted territory: Nine of the 10 all-time heaviest trading days occurred during the month. Its 14.5% monthly return put to shame the pretty darn good 2% to 4% performances of such indices as the

S&P 500

,

NYSE Composite

and

Dow Jones Industrial Average

.

Would

Dickens

then describe November as the best of times and the pretty darn good times?

Jefferson

never asserted that all stocks are created equal, and no one argues credibly that life is fair. Market returns in recent years have been characterized by yawning gulfs in relative performance, with U.S. equities leaving bonds, cash and international equities in the dust. Within U.S. equity markets, large-caps have outdistanced small-caps by historic margins, and growth investing has topped value so relentlessly that its superiority may come to be taken for a law of nature.

It is not fully accurate to describe investment market history in recent years as a matter of winners and losers, since most U.S. financial assets have provided positive returns. But the difference between winning and winning really big has been spectacular, even awe-inspiring. And now, even within the top-ranked asset class of U.S. large-cap growth equities, a dramatic separation of sheep and goats seems to be taking place. The subset of really big winners is becoming ever more exclusive.

The enthusiasm for Internet investments, and for technology in general, might be described as a mania even by observers who are not cognizant of the chill that term induces in students of market history. The Internet today is seen as the key transformational factor in creating the future economy, attracting a disproportionate share of investment interest. Technology, in general, is propelling market averages to all-time highs at the same time that the "average stock" is languishing. With the tech-laden Nasdaq up 60% since the start of 1999, only 28% of NYSE-listed issues are trading above their 200-day moving averages. After nearly a year's trading exertions, less than one-third of NYSE issues are showing positive returns. By coincidence, that 28% figure mimics the reading at the same time in 1994, when the Nasdaq was down 3% year-to-date.

Breadth is getting ever more narrow. Within even the superior Nasdaq, performance is closely held. The top 10 names by capitalization --

Microsoft

(MSFT) - Get Report

,

Cisco

(CSCO) - Get Report

,

Intel

(INTC) - Get Report

,

Qualcomm

(QCOM) - Get Report

,

MCI WorldCom

(WCOM)

,

Nextel

(NXTL)

,

Sun Micro

(SUNW) - Get Report

,

Oracle

(ORCL) - Get Report

,

Dell

(DELL) - Get Report

and

Global Crossing

(GBLX)

-- have soared by 272% on average in the past 12 months. Leave out Qualcomm's rocket ride from 27 to 384 and you still get a 155% average gain. Note: These are unweighted, unaudited, back-of-the-envelope calculations -- and at this scale, even a rounding error comes to tens of billions of dollars.

Not a soft drink or a pain reliever or a specialty retailer or a financial firm on that list. What's a growth stock? See above.

These stocks and a few more like them seem to have an unlimited ability to absorb market flows. If those flows were themselves unlimited, the compelling attractiveness of these tech names wouldn't create problems for homelier "old economy" stocks. But money, presumably, is not unlimited. The divergences in return that have taken place indicate that one part of the garden will be parched so that another part can be soaked. Which will be the last stock standing?

The market reaction to the employment report on Friday was fascinating. The numbers reinforced the impression of robust demand for labor, what with November's data plus revisions to past reports totaling one-quarter million new jobs. But average hourly earnings were up only 0.1%. Strong growth. No inflation. Stocks and bonds both took off, presumably on the thought, or the feeling, that these numbers reduced what was taken to be an already low likelihood that the

Fed

would surprise with yet another adverse tightening move.

But with $2 trillion in new wealth from Nasdaq alone, plus paltry billions from other positions, it is not easy to see that economic growth is slated soon to slow down. Unlike the Nasdaq, bonds and the Fed are uneasy about that prospect.

As I watched Friday's market action, slack-jawed, I was nagged by an image of

Alan Greenspan

reacting with asperity to a journalist's question about the widespread belief that monetary policy reacts asymmetrically to market action -- quick to ease when prices drop, slow to react when they rise. Greenspan snapped, "We are not asymmetric, the market is." He then explained that policy would respond, symmetrically, to outsized market moves in either direction.

The Nasdaq market's move does indeed inspire awe. But then Greenspan's comment kind of makes you think. What do you think the Fed would have done if the Nasdaq had fallen 30% in the past seven weeks?

Jim Griffin is the chief strategist at Aeltus Investment Management in Hartford, Conn. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. Aeltus manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at

GriffinJ@aeltus.com.