The kicking the Dow Jones Industrial Average has contended with since peaking early last year is nothing compared to the 60% thrashing the Nasdaq Composite Average has endured.
And within the
S&P 500, while traders pull out their hair from the losses in technology, a handful of sectors -- namely steel, automobiles, chemicals and some manufacturing names -- are hanging in there, thank you very much.
Daily headlines -- and CEOs of bellwether technology companies -- scream out recession on a daily basis (yeah, that's you,
Chambers!), but the activity in these other sectors suggests something different. Now, nobody's suggesting that the economy is actually going along strong and the tech sector's just having a bad time. But, it appears that the economy, outside of technology, is faring a bit better than the technology sector itself, and still anticipating economic recovery, however tentative.
The evidence is in the stocks that have hit 52-week highs in the past several days, such as
, defense/aerospace name
and instrument-control maker
"There seems to be a budding disparity going on between the performance of technology in the economy and the economy as a whole," said Steven Wieting, senior economist in
Salomon Smith Barney's
institutional equities group. "The economy is growing well-below trend, but when you hear tech CEOs talk about an extinction-level event, they're talking about their outlook."
Dow in a Range -- Nasdaq Not
Oddly, it's the same assumption that the
made in January, when it raged dramatically higher after the
Federal Reserve surprised the market with a half percentage-point rate cut, the first of two such cuts in January. But strategists say the outlook for technology stocks has changed, due to the realization that there's been heavy over-investment in technology and new spending isn't needed now.
So, these overvalued stocks, which one would expect to rebound in the expectation of a cyclical upturn, are still taking it hard, as investors wonder how long it will be before a recovery in earnings and spending. Companies are still benefiting from having spent money on new technology, but it could be that -- for the next year or so -- new spending won't be as urgent.
Because of this, the technology stocks, in their free fall, are displaying investors' desire for a market-saving interest rate cut not tomorrow or today, but 10 minutes ago. That's why technology stocks have dropped in response to stronger-than-expected economic data -- they're looking for a savior, and good news means no savior. Meanwhile, the cyclical stocks have rebounded, because when the economy is growing, it's good for those companies.
Recent economic data confirm that. The economy isn't strong, but there have been a handful of upside surprises in economic reports in recent weeks. Nondefense capital goods orders showed a rebound in the past month, and the retail sales reports have shown reasonable strength in cyclical areas, including building materials, automobiles and apparel. Steel production is up for the seventh week in a row, indicating renewed need in the hard-hit manufacturing sector.
Those stocks have reacted. The
Morgan Stanley Cyclical Index
is up 4% since Feb. 23. Ford recently nailed a 52-week high. Steel stocks, including
, have shown considerable strength. Manufacturers like chemical company
and industrial parts and aerospace maker
have all performed quite well.
"Having gone to the extreme of thinking
tech wasn't economically sensitive, we're now thinking they'll not be able to recover," said Paul Rabbitt, president of
. "Whereas in the manufacturing and commodities areas, we've always considered those economically sensitive. The classic rule is, you buy them before the turn."
Ford Tough, S&P Has Rough Ride
A similar phenomenon can also be noticed in business investment. It wasn't just that investors poured all kinds of money into technology stocks and those companies themselves were just providing better returns than anyone else. The companies, too, were the beneficiary of increased investment and increased spending from other technology companies, such as fiber optics, cellular-phone makers and Internet companies.
Now, that spending has dried up: Money isn't being poured into Internet companies anymore, so the stocks don't see the money anymore. Conversely, there's anticipation that the industrial machinery, steel and auto parts sectors will see a rebound in spending more quickly. Orders of communications equipment, which averaged a 30% year-over-year gain in the summer, during the past three months have increased on average just 0.1%.
This isn't to suggest that the technology sector won't rebound at some point.
The combination of Fed rate decreases and an expected pickup in demand will ultimately help the technology sector. But there's recognition now that technology wasn't immune from cyclical forces. In 1999, technology was in a cycle -- a wild, exaggerated version of the cycle everything else was in, but a cycle nonetheless. Now, it's hit that cycle on the downside, even while other sectors suggest there's potential for economic recovery.
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