New Economy and old rules

Stock market: Investors dump blue chip companies for the newest unproven dot-coms.

March 10, 2000

FORGET about the old ways of categorizing companies. Today, investors seem to divide companies into two categories: those participating in the New Economy and those mired in the Old Economy. The current infatuation with New Economy stocks may be a dangerous fling.

Stocks in the New Economy companies -- loosely defined as those involved Internet, wireless and biotech -- continue to climb to stratospheric heights even though many have yet to turn a profit.

At the same time, share values of well-established, profitable manufacturing, banking, transportation and services companies continue to fall.

As investors drive up the values of these New Economy companies, policy makers such as Federal Reserve Chairman Alan Greenspan grow nervous. His fear? As their portfolios increase in value, consumers spend more, which could lead to inflation.

Despite increases in interest rates four times in less than a year, the market's highfliers remain just that. The rate hikes have only further depressed shares of Old Economy companies.

Eventually, higher interest rates will bring the high-tech companies to heel. As rates climb, the threshold for investing in these companies will get higher. The capital that now readily flows into these enterprises will slow down as less-risky alternatives become more attractive.

Whether companies are in the New or Old Economy, the old economic rules still apply. Making money is the ultimate benchmark for determining value. The time is approaching when the New Economy companies will have to justify their high prices.

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