Wall Street's gyrations could wake the bear

Shifting of money from `old' blue chips heats up tech stocks

March 11, 2000|By William Patalon III | William Patalon III,SUN STAFF

Is that shadow darkening Wall Street's canyons a bear?

With 25 of the 30 big company stocks that make up the Dow Jones industrial average showing a loss for the year so far -- and 10 of those down more than 20 percent -- blue chip investors might suspect that's what is clawing their portfolios.

For investors in technology stocks, it's quite a different story.

The Nasdaq bull, with its heavy load of technology companies, continues to charge ahead, closing above 5,000 for the first time Thursday. Even in the Dow, the two companies showing big gains this year are chip maker Intel Corp. and computer and printer manufacturer Hewlett-Packard Co.

The sharp divergence makes calling a bear market -- never easy -- much more complex, reflecting investor perception of shifts in the economy.

"It seems as if there are two distinct worlds out there," said Hugh Johnson, chief investment officer for First Albany Corp.

"One of the worlds -- so-called `old economy' stocks -- is finding less demand than the so-called `new economy,' or computer technology firms. There is a view that there is still a business cycle and ... it will affect all the `old economy' stocks well before it does the `new economy' firms. ... There are lots of signs they see the end of the bull market and the start of a bear market. "

The Dow isn't officially in bear territory yet -- defined as a 20 percent drop.

But it certainly is in the neighborhood, down 15 percent from its Jan. 14 high. And some stocks have plunged to terrifying lows.

Such blue-chip stalwarts as Procter & Gamble Co. and Berkshire Hathaway Co., for example, have been mauled: P&G is down by just over half in the past year, while Berkshire Hathaway tumbled 49 percent, or $39,000 per share.

At the same time, the Nasdaq composite index, which was up nearly 90 percent in 1999, is up an additional 24 percent this year. Some companies have shown astonishing gains.

PMC-Sierra, which makes semiconductors for high-speed networks, has rocketed from $17.25 to $245, a 1,323-percent gain in the past year.

Such contrasts have market-watchers debating whether this is a bear market. Some say the current down trend is only a correction.

But with the shares of so many long-established companies down so far, other veteran investors are increasingly calling this a "stealth bear market," or even a full-blown bear market for blue-chip shares.

Length and depth

The main reason for the disagreement: Though most agree that magnitude -- the 20 percent drop -- is a defining characteristic of a bear market, many argue that it's not the only one. Some demand duration of more than three months, as well as economic pain.

Since 1926, there have been 12 drops of 20 percent or more by the Standard & Poor's 500, a market average that's broader than the Dow and is more widely used by professional investors.

Most were clearly bear markets -- such as the 33 percent drop from September to November 1929 that included the Great Crash, and the gnawing 42.6 percent retrenchment from January 1973 to September 1974 that the more seasoned market pros still recall with a visible shudder.

But debate still rages today over whether the three-month, 29.5 percent drop from September to November 1987 -- which included the October 1987 stock market crash -- really qualifies.

After all, thanks to deft maneuvering by the Federal Reserve under Chairman Alan Greenspan, the crash didn't slow the economy, and the stock market executed a quick about-face, climbing more than 70 percent over the 30 months that followed.

Because the Dow's current slide began only in January, too little time has passed for it to be a true bear market, market analysts say.

Bear markets typically also have a psychological element that -- at least for a time -- destroys investors' faith in the reliability of stocks, said James Grant, editor of Grant's Interest Rate Observer, a newsletter that's both popular and notorious for its perennially bearish bent.

"Bear markets are noted for the complete loss of confidence in an asset class," Grant said. "People have not yet lost confidence in common equities, just in the paper companies or industrial concerns that are associated, as such, with the `old economy.' "

Reverberations in economy

In some cases, this fear is so deep-seated, and the economic damage so profound, that the bear market actually roils the economy, experts say.

Of the eight U.S. recessions since World War II, two have been preceded by bear-market declines of at least 20 percent, and three others were presaged by stock market corrections of at least 14 percent, according to two research bureaus, the National Bureau of Economic Research and Ibbotson Associates.

Even if investors haven't lost faith in blue-chip shares, they've clearly fled them for the high-technology stocks that make the Nasdaq their home.

Some experts worry, however, that continuing to pursue this course, investors aren't just inviting the bear over for dinner -- they're setting the table for him.

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