To say the markets have been volatile lately is like saying light moves quickly; a bit of an understatement. Largely centered in the technology stocks, trillions of dollars in real and paper value evaporated in a few weeks as investors reconsidered the valuations of almost all technology companies, and many other sectors as well. The technology focused NASDAQ’s Composite Index illustrates well the stunning change in valuations, dropping from a high of 5048.62 on March 10th of this year to touch a end-of-day low of 3321.29 on April 14th. This seems pretty dramatic, until you put it into perspective: on March 10th of 1999, the index closed at 2406 even.
Put in other words (numbers?), at the worst point the NASDAQ Comp index was still up 38% for the last year, a performance most Dow Industrial Index participants only covet. Significantly, many non-technical sectors and stocks were the beneficiaries of the exodus, with several so-called “old economy” stocks gaining previously lost ground or reaching new highs. This showed that a large amount of the money moving out of tech was not leaving the markets entirely.
Although it is generally agreed the correction was triggered by the strong verdict against Microsoft delivered by Judge Jackson, many market observers were previously wondering aloud when, not if, the tech/Internet “bubble” was going to burst; or at least, correct to be based on some kind of rationale. Sure technology and the Internet are the future, and oh-so-cool, but at some point in time, even “new economy” companies need to make profits, or what is the justification for the high valuations?
Frankly, what’s been happening in the last few weeks, and is likely to continue for several more, is healthy from a long-term perspective. Technology stocks got way ahead of themselves, as did some other sectors. Investors were caught up in the rocketing appreciations, with some buying on margin stocks they knew nothing about. The only problem with momentum plays, though, is they always end sooner or later.
At the same time, it is important to keep in mind that in many cases, the fundamentals behind company valuations haven’t changed significantly. While Microsoft’s future has become somewhat uncertain, and some “Dot Coms” are starting to run out of money, for many companies things haven’t looked quite this positive for some time. What’s occurring now is the markets are busy reevaluating each and every company, treating some unfairly harshly. These will recover over time.
Not to encourage anyone to run out and buy Tech stocks just because they’re cheap (or, perhaps, simply reasonable). Investing, particularly in high-risk ventures like technology stocks, demands discipline, objective research and patience. It can be argued that it has been almost too easy to make money on the stock market lately, with individuals and even institutions exposing themselves to too much downside risk, thinking the worst can’t happen.
But for anyone who’s done the research on one or more tech companies, likes the fundamentals and the long-term prospects, and has simply been waiting for a buying opportunity, this could be a good time to move. On the other hand, being the market, it could instead be a really bad time. If you’re not prepared to deal with the downside, both financially and emotionally, don’t invest.
Returning to Microsoft for a moment, it is worth noting they will be experiencing, and to some degree, causing, volatility in the markets for some time to come. The latest issue, as of this writing, is weaker than expected sales in the latest quarter, and leaked news that the US Government and States are likely to ask for MSFT to be broken up. Most suggested variants of the break-up include the Windows operating systems being separated from the applications. This drastic move is being considered because behavioral remedies are not thought to be workable.
History suggests, from the previous breakups of AT&T and Standard Oil, that the total value of the parts may be worth more than the whole. This could be good news for MSFT shareholders, but the stock still dropped $13 a share on the news, closing at its lowest in 18 month. Some observers have suggested that investors don’t like the idea of the divested MSFT units having to compete on merit instead of being able to rely on tying. Oops. I meant innovation.
Few question the importance of technology in our future, the only uncertainty is which forms it might take, and who’ll be providing them. With a (almost) level playing field, truly innovative solutions have a chance of being the winners. The only trick, is to find the companies working on those solutions now. Not ruling MSFT out by any stretch of the imagination, but not automaticly ruling everyone else out either.
Published in the Victoria Business Examiner.