A bubble waiting to burst?

INVESTING

Wonders of technology have extended to stocks

September 12, 1999|By Bill Atkinson

THERE SEEMS to be no stopping big technology.

Year after year, the behemoths of the technology sector keep surprising investors with higher earnings, which have led to surging stock prices and bulging market caps.

And this year is no different. Share prices of technology companies tracked in the Standard & Poor's 500 stock index were up 31.4 percent as a group from Jan. 1 to Aug. 27, according to a study by Edward Yardeni, the chief economist and global investment strategist at Deutsche Banc Alex. Brown in New York.

"It has been such an awesome area of performance for so long," Yardeni says.

He says most of the group's success can be laid on the broad shoulders of International Business Machines Corp., Dell Computer Corp., Intel Corp., Cisco Systems Inc., Lucent Technologies Inc. and Microsoft Corp. He terms these companies the "Big Six."

Investors have fallen in love with these companies. They've pumped so much money into them that their market capitalizations -- the stock price multiplied by the number of outstanding shares -- have swollen to a combined $1.5 trillion.

Five years ago, the combined value of these stocks was just $117 billion.

Now, they are close to surpassing the total gross domestic product of the world's fifth largest economy, India, which is $1.53 trillion.

Yardeni and his associates conduct weekly reviews of market sectors to determine which are performing best.

The latest public report, called the "US Stock Sector Derby," measures the performance of 11 sectors ranging from consumer staples to health care to energy.

The reports give investors a big-picture view of how sectors are doing and how they compare with others in group.

While technology steals the show, beating the S&P 500's return by nearly 21 percentage points for the first eight months of the year, other sectors have been hot, too.

Energy was up 20.4 percent for the period. Basic materials, which include companies that produce aluminum, chemicals, iron and steel, jumped 19.2 percent. And capital goods, which include companies that make trucks and machinery, was up 17.4 percent.

Like technology, these sectors have benefited from economic recoveries in Asia and Europe, Yardeni says.

"Investors are voting for the view that the global recovery is for real and substantial," Yardeni says.

He's troubled by technology's dominance, however.

"It can't be healthy," Yardeni says. "It is not a good sign that the market is so narrow."

What bothers him is that the Big Six are almost too good. They are masters at managing their businesses, and they rarely disappoint analysts or investors.

"They are kind of perpetual prosperity machines," he says. "I am a little concerned that this market is going to get narrower and narrower, and it is really not a market, but becomes a handful of stocks."

One way to make money, Yardeni says, is to bet against the market and look for companies in sectors that have been beaten up.

"Consumer staples, a dog, might be the place to be again," he says. Companies in this sector do everything from running restaurants to selling soft drinks and entertainment.

Health care has been another poor performer, down 2.5 percent for the period.

"It has been out of favor for too long," Yardeni says. "It certainly is a safer bet than technology if the economy doesn't perform swimmingly well."

What could short-circuit technology?

Yardeni argues that it could be a year 2000 computer glitch that causes major problems for the economy.

While he has never called for a disaster, Yardeni has said that the economy could spiral into a recession if there is a major computer malfunction next year.

He thinks that too many people are complacent about the subject.

"This is the first time in human history that so many humans depending on other humans have assumed that they won't screw up, that they are going to get this problem fixed," he says.

"It is nice to see that we have come to a state in our civilization that we trust each other so much."

Yardeni says a year 2000 disaster could burst the technology sector's bubble.

"If year 2000 isn't the event, it will happen in more traditional fashion," he says. "You reach a point where the game does change."

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