The precipitous decline of tech-stock powerhouses
standing as the market's largest stocks. But in an increasingly valuation-focused market, does being the biggest stock mean taking a fall?
For this long-running but increasingly gimpy bull market, the answer isn't purely academic.
To listen to some observers, GE and Intel are market bellwethers, and as long as these stocks hold their ground, bulls can breathe relatively easy. On the other hand, there's the view that no stock can expect to maintain a market cap of this size -- GE's valued at almost $500 billion, and Intel at around $370 billion -- amid a fierce selloff that has knocked some 40% or more off Microsoft, Cisco and the
. So a slump in GE or Intel, according to this thinking, also could mean more marketwide pain.
"GE is without a doubt the market's bellwether and its beacon," says
, vice president at
Arnhold & S. Bleichroeder
and a contributing writer to
That's probably because, Roque says, GE has its vast operations in different parts of the markets: The
parent is a media play, it's a financial-services company and it's a manufacturer. "It is economically sensitive enough to be a bellwether, and economically important enough to be in three sectors at least."
Tough Going for Tech
GE's trending direction, Roque says, has correlated tightly with both the
over the past five years. What that means in practical terms, he says, is that GE's relative strength in the market -- it's down about 9% from its April high, compared with the S&P's nearly 12% fall from its 52-week-high -- is a bullish sign. "If GE is able to remain firm, the downside for the Dow and the S&P is generally limited," he says.
But a GE decline to below 47 1/2 is a negative sign, he says, and a fall to 45 is a bearish sign that "the environment we're seeing here is going to last longer," he says.
Steve Shobin, chief technical analyst at
, agrees that GE is a microcosm for the economy. But his numbers are a little different. A closing price for GE under 47 is moderately bearish, but one below 42 would be "extremely" bearish, he says. "Right now, I'd rate GE moderately bullish, which is a good sign for the market," he says. A close above 56 1/2, he says, would point to a much more "robust" market.
Tougher to Game
Well, whither goes GE? Unfortunately for the company, it's entering a tough time for big, liquid large-cap stocks, says Michael Metz, portfolio manager at
CIBC World Markets
and the firm's former chief investment strategist. When money is flowing out of funds, managers have to increase their cash position. "What you do is sell what you can," he says -- large-cap, liquid holdings. That's already caused the decline in large-cap tech stocks, and it could hit GE, too, he says. "It really has nothing to do with the fundamental merits of the company," Metz says.
Another bad sign for GE, says Metz, is that the market appears to be entering a period in which stock indexing won't work, similar to the time between 1966 and 1982, when the Dow stuck around 1000. Because fund managers have bought into GE and Microsoft as a way to shadow the indices, they'll likely pull out as their multiples shrink and it's no longer such a smart idea to index the market, he says.
Intel's a lot tougher to game. Tuesday's drubbing left the stock down a considerable 23% from its March high. But that decline is far more moderate than that suffered by fellow Nasdaq bellwether Cisco, which has tanked 37% in that period. Moreover, despite recent market volatility, Intel remains up a mighty 33.5% on the year, while the
Nasdaq Composite Index
has fallen 22%.
Some observers attribute that outperformance to a shift in market psychology toward an emphasis on steady growth in mature industries. "It shouldn't be any surprise that Intel has done fairly well here," says John Bollinger, who manages money at
and is president of
. "Look at Intel: Its main line of business is easy to understand, it's easy to figure out the demand and what their growth potential is. You end up with a picture that most analysts can get their hands around."
Intel has been rewarded with a multiple that's very high by historical measures; its trailing P/E is sitting near 48. But compared with Cisco and its P/E of 140, Intel's a bargain.
"The kind of growth that a 140 multiple implies is improbable," Bollinger says. "Many small companies can sustain the type of growth necessary for that type of multiple, but not many large companies
can." Bollinger is neither short nor long Intel or Cisco.
Fundamentals will have a lot to do with how Intel fares in the medium term. If the heavy demand for microprocessors the company and analysts have forecast does indeed materialize in the second half of the year, Intel could gain valuable pricing power. But whether the company can leverage that power will hinge on its ability to shake off supply constraints to meet demand.
Yet, there are macro concerns as well. Some fear that the
vigilance could sustain the current climate long enough to threaten the market's current bellwethers, too.
"Are these places to hide?" asks Scott Bleier, chief investment strategist at
. "Yeah, but they'll get around to it. This market is going to wear everybody down on the downside, just like it did on the upside." Bleier has no position in GE, Intel or Cisco.
"This market's desire is to shoot everybody," he says. "And it will get around to shooting Intel and GE."