The Nasdaq composite index suffered its third straight triple-digit point loss yesterday -- though it pared deeper declines -- partly because investors fear that stock prices of high-tech companies are overvalued in relation to the profits that they will deliver.
"The smart money is fleeing before the rush," said Frederic Russell, president of Frederic E. Russell Investment Management Co. in Tulsa, Okla. "Earnings will be strong, but nothing will satisfy investors."
The Dow Jones industrial average also fell yesterday, but only slightly, as investors continued to pull money out of high-tech shares to put the proceeds into "Old Economy" stocks, market analysts said.
The Nasdaq fell 186.78 points, or 4.02 percent, to end the day at 4,457.89.
The 4,500 mark was viewed as a major technical support level for the Nasdaq. Analysts also said many fund managers were doing their "window dressing" by packing portfolios with high-performing stocks on the next-to-last day of the 2000 first quarter. The quarter ends today.
At its low point, approximately 3: 30 p.m., the Nasdaq had shed nearly 289 points, or 6.2 percent. With yesterday's close, the Nasdaq sits 11.7 percent below its March 10 high -- more than the 10 percent needed to qualify as a correction.
The Dow Jones industrial average fell 38.47 points, or 0.35 percent, to close at 10,980.25.
Wireless data company Qualcomm Inc. fell $12.2656 to $145.2344; Cisco Systems Inc., the No. 1 maker of computer-networking equipment, fell $2.4375 to $73.625; and No. 1 computer-chip maker Intel Corp. lost $4.875 to $127 to feed the decline.
United Technologies Corp., Honeywell International Inc. and Coca-Cola Co. rose, limiting the Dow's loss. United Technologies rose $3.75 to $61.375; Honeywell, the biggest maker of automated controls, gained $2.50 to $51.50; and Coke climbed $1.6875 to $48.5625.
Heightening investor worries was a government report showing that the U.S. economy surged at an annual growth rate of 7.3 percent in the fourth quarter, which likely reinforced stockholders' fears that the Federal Reserve will continue to raise interest rates in hopes of slowing the economy down.
Argus Research Senior Economist Richard Yamarone said yesterday's economic data -- strong growth, low inflation and falling interest rates (as measured by the long bond) -- were a trifecta of good news for Old Economy stocks, whose companies will no doubt perform well under such near-ideal economic circumstances. That is why the Dow fell so little compared with the Nasdaq, Yamarone said.
The broader Standard & Poor's 500 index fell 20.60 points, or 1.37 percent, to end the trading session at 1,487.92. Economic news yesterday complicated the predicament investors found themselves facing. Despite the fast growth in the final quarter of last year -- a pace that the Fed wants to slow, fearing it could spark inflation -- little inflation has yet to appear. An inflation index tied to the gross domestic product showed that prices remained fairly well-controlled during the fourth quarter, rising at an annual rate of about 2 percent, up just a bit from the 1.7 percent of the third quarter.
But with the Fed's stance on fast growth so clear, economists say the strong growth report leaves little doubt that rates will go higher -- which can be bad for stocks, since higher interest rates crimp corporate profits and make competing investments more alluring.
The GDP, the total of all goods and services produced in the United States, will probably expand at a 3.6 percent clip in this year's second quarter, according to 34 economist surveyed by Bloomberg News. By year's end, the economy will probably be growing at a 3.3 percent pace, the economists said -- the first time in four years the U.S. economy will turn in an annual growth rate of less than 4 percent.
The current expansion enters a record 10th year at the end of this week.
"This economy is bullet-proofed," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi Bank in New York City. Analysts "can't argue with four years of 4-plus percent real [growth in] real GDP."
While the economy may be bullet-proofed, tech stocks are getting bullet-riddled.
Though just a few weeks ago, it was the Old Economy stocks of the Dow that were feared to be in a bear market, now it is the technology shares, which have led most of this long-running bull market, that have investors concerned. Almost two-thirds of all Nasdaq shares are down in price 30 percent from their 52-week highs, said Jeffrey Warantz, an equity strategist at Salomon Smith Barney. Some see this dip as a buying opportunity, though, which fits the pattern this elastic market has demonstrated time and again: Leading stocks dip -- and then rebound -- as investors pile into these "bargains."
"It's the fast-money crowd of people who trade on very minor news," said Rich Barnett, portfolio manager for National City Investments in Beverly Hills, Calif. "We're looking at this as a buying opportunity."