NEW YORK-Technology stocks have had an extended run of public preference, but they are poised to step back in 2001 as investors seek better returns elsewhere, according to some Wall Street investment strategists.
Ralph J. Acampora, director of technical analysis for Prudential Securities Inc., called today’s environment “a stealth bear market.” By that, he means investors are beginning to rotate their portfolios out of currently favored business sectors into others. A true bear market, by contrast, means investors are moving their money out of equities altogether.
“We’ve had five years of double-digit gains, and what are the odds of repeating that? Instead of dot-coms and semiconductors, investors should buy waste management, hotels, tobacco and other value (i.e., undervalued) stocks,” he said last week at the New York Society of Security Analysts “Midsummer Market Forecast” seminar.
“Yesterday, the stock market went up and Lucent went down. There will be a rotation, and you won’t have the dot-coms, Lucents and Nokias in it, and that will be good. … But what worries me most about late 2001 is that it could be the final washout of tech stocks.”
Richard Bernstein, chief quantitative strategist for Merrill Lynch & Co. Inc., said the plain facts have yet to dawn on equity investors as a group. Over the last 12 months, bonds have consistently outperformed stocks.
“The question is one of market perception vs. what’s really going on. The (stock) market is moving sideways, with single-digit returns. As people perceive this, there will be a bear market because they will become more cautious and move to higher-quality investments,” he said.
“But more than anything (Federal Reserve Board Chairman) Alan Greenspan has never engineered a soft landing in global financial markets, which are not the same as economies. Asia already is plummeting.”
Bernstein said he still sees tremendous opportunities, but he remains cautious about tech stocks, which today represent 40 percent of the market.
“If techs get blasted, everything else will go down, as will happen,” said Philip J. Roth, a principal and chief technical market analyst for Morgan Stanley Dean Witter & Co. Inc.
“We are transitioning from a market giving us outsized returns, and people should get used to more typical earnings. S&P is up 12 (percent to) 13 percent year-over-year. Nasdaq is up 50 percent, which means it’s overbought and you should look for a negative slide.”
Gail M. Dudack, chief investment strategist for UBS Warburg L.L.C., described this year’s conditions as “a bear market with a bubble in technology, and when that bubble bursts, we will have a true bear market.”
By year-end, when there is widespread realization that cash and bond investments have outperformed stocks, a widespread shift will occur from momentum investing for quick gains in share price to value investing in companies with predictable earnings, she added.
A gaggle of positive earnings surprises has helped fuel investor enthusiasm this year, but these may well be bogus indicators, Bernstein said.
“More and more companies are doing positive earnings surprises, and I am surprised analysts don’t ask why a company reports (positive) surprise after surprise,” he said.
“(Positive) earnings surprises have been manipulated by IR (investor relations) folks. The downside is that companies really get bashed for negative earnings surprises.”
Another troubling trend, according to Dudack, is that the overall performance of the stock market has not matched the huge capital inflows into mutual funds, two-and-a-half times those of last year.
In Roth’s view, this can be explained because the burgeoning number of dollars to be invested is no match for the stampede of initial and add-on public offerings.
“Secondary offerings are at record levels, and IPOs are huge, especially for August, which typically is a slow month. This puts a cap on the upside,” he said.
Dudack said she is concerned about mutual fund inflows by American investors because many members of the general public are using borrowed money rather than savings to play the market. Furthermore, she also is worried about the impact on foreign investors, should the American dollar decline.
“Foreign investors, who have an important effect at the margins, first entered the U.S. market in 1997 and bought the 50 largest companies in the S&P 500. In 1999, they have concentrated on technology, media and telecom and helped the outperformance of these stocks,” she said.
“There is a huge (U.S.) trade deficit, a record percentage of GNP (Gross National Product), that will cause the dollar to decline at some point. That will turn foreign buyers into sellers.”
Amid the bearish views espoused by four members of the panel, one rosier view was offered.
“I am a dyed-in-the-wool growth investor, so I don’t make broad market calls. From my bottom-up perspective, things look pretty good,” said Liz Ann Sonders, managing director of Campbell, Cowperthwait & Co.
“Earnings growth underlying the market is very good, specifically in the tech sectors. … We are in the early innings of an information revolution in a disinflationary environment, and companies are still growing their earnings.”
