As the bulls began stealing back into the stock market in recent days, many investors continued to eye tech stocks with a quiet, lusty hunger. After all, many tech bellwethers are 70% or more off their highs of last year, and that screams out "cheap." Plus, nobody has forgotten the riches made on tech over the past five, 10, 20 years as it yanked the stock market briefly into the stratosphere.
But cheap is a
dangerous word. If the market really is on the brink of a move higher, technology probably isn't going to be leading the pack, market strategists say; right now it appears likely that the next fashion will involve slower-growing so-called value stocks, rather than the growth stocks that so tickled investors during the past decade. In fact, if history is any test, tech stocks won't be back in fashion for at least several years. Even then, only the real powerhouse companies will have a chance at recovering their former glory. Others will fade and many will disappear.
"If you look at the bubbles of the last 40 years, the leadership of one bubble was not dominant in the next bubble," says Marshall Acuff, portfolio strategist at
Salomon Smith Barney
. "After the Nifty Fifty bubble burst in 1973, it was better to own oil and gas standout
than Nifty Fifty consumer-products giant
The Nifty Fifty was a broad group of 50 service-economy stocks, so-named in 1960 by lawyer and amateur strategist Jim Multz. The group had a 10-year rally, peaked in 1972 and then collapsed. Some went to zero, while others lost three-quarters of their value, bottoming out at the bear-market lows of 1974.
The carnage was everywhere: Nifty-fifty standout
didn't regain its early '70s high until eight years later, in 1982. Once-favored stocks like
never really came back.
In the aftermath, energy and oil stocks took the lead, then were replaced by high-tech stocks at the end of the '70s. Accordingly, most market pros say that this time around, the move is toward value. "Growth has been a predominant theme since 1994, but beginning last year value began to lead," says Acuff. "It's also very typical after a bull market that people sober up and focus more on value."
So-called value stocks offer investors slow but solid earnings growth. That tends to reduce the prospect for upside momentum, the very force that drove the late-'90s excesses in high-growth areas. But value stocks carry, also, lower downside risk as well. And a year after the
Nasdaq's stunning 60% decline, that's a trade many people in this market are increasingly willing to make.
"The new areas that are coming forward probably won't have the growth characteristics that the areas that have been dominant in growth have had," says Acuff. "They will occupy an interregnum of sorts and will occupy investors' attention until the growth areas pull themselves together."
Within the universe of value stocks, strategists like utilities because low supply and high demand have jacked up prices and profits, and should continue to do so for a while. In fact, Rich Bernstein, chief quantitative strategist for
, says he believes the best investment opportunities now are in those sectors that were damaged by the technology bubble -- namely energy and utilities, as well as engineering and construction, coal, and industrial gases. Bernstein says these sectors are most likely to show strong growth because they were deprived of access to capital during the tech boom. So much capital went to tech companies that there was little left for many other sectors, and the utilities in particular now have plenty of projects pending.
Health care stocks are also seen playing a leadership role in the next bull market because the baby boomers are getting older and health care is becoming a more important part of U.S. and world culture.
"One of the reasons we believe in health care is not just because of the demographics, but because it is an area at the frontiers of science today and because health care is increasingly important to a growing part of our population," says Eric Bjorgen, analyst at the
Many of these nontechnology stocks have already had strong run-ups. In the first three months of this year, the Nasdaq Composite Index has underperformed the broad market
S&P 500 by 14 percentage points. Energy, health care, defense and tobacco stocks were some of the best-performing sectors last year. Meanwhile,
price-to-earnings ratios in these areas remain lower than those in tech.
Monday, the blue-chip
Dow continued to rally back smartly from last Thursday's bear-market lows. But unlike last week, investors were suddenly ignoring tech stocks. Strength was concentrated in a bevy of industrials and old economy stocks: airplane manufacturer
, consumer-products giant
, drug lord
, tobacco king
and diversified industrial
. The Nasdaq Composite Index spent most of the day in the red.
This may be a sign that investors have finally realized they must look for new market leaders. If this trend continues, it could signal the bulls again are here to stay.