May 2000

Financial Affairs, volatility on the US stock market

The markets in the first quarter

The US and for that matter the world’s stock markets have delivered an incredible growth during the first quarter of the new millennium. New all time highs were reached on several stock markets around the world but especially the U.S. based Internet, Technology, Communication, ITC, companies doubled or even tripled in value. The emerging markets also reached new highs as they could continue the recovery started in 1998. The markets in general carried over their bull tendency from the last quarter of 1999.

This essentially lasted until the second week of April 2000, Friday the14th, saw an very large drop in the share prices, were especially the ITC markets experienced a nearly free-fall, the Nasdaq index lost over a quarter of its value. The unbelievable growth of the first three months was wiped away within a couple of days.

The drop in share prices happened in an economic situation were the economic growth in the U.S. was equal to the previous years with only a small increase in the inflation which is caused by the increased oil prices, from $ 12 to $ 28 dollar a barrel. The economic growth is based on strong fundamentals as U.S. companies keep on turning out good earnings figures with over 70 percent of the companies coming out with earnings above expectations. The U.S. economy is in better shape than ever before and seems able to stay in very good shape. The economies of the world are at the same time improving. Europe is slowly growing to the growth figures of the U.S. of the last decade, around 4 percent where as Japan and the emerging markets are definitely on the road to recovery with growth figures of over 5 percent annually. The Asian economy has the additional benefit that the foundation of the new growth is stronger than ever before. More money into productive sectors, no short term debt and restructured companies.

The economic forecasts, fundamentals, are therefore very promising. The recent correction is only of limited effect as the share prices are and were of a large number of companies much to expensive and based on unrealistic expectations. The internet/tech craze created a bubble which at some moment had to burst..

The correction of the stock markets, especially the ICT stocks, could turn out to be very healthy to the stock markets in general. The blue chips and the socalled old economy stocks, which lagged behind in the first quarter, or for that matter in the previous quarters, have now the chance to improve and at least partially recover their former position and role. ICT will remain strong players but the old economy companies still have something to offer in products, profits and potential especially if the new technologies are applied in their businesses.

Volatility in the future

The large drop in share prices and indexes after a period of big gains and the up and down movement is a perfect example of the volatility in the stock markets.

The correction ghost was already around for some time. The stock markets, the fund managers, needed in this kind of situation only a small incentive to drop the overvalued ICT stocks of which a number never had turned in profits and/or had a earning per share in the 80 + range. The threatening interest rates rise and/or an earning warning from a tech or tech related company could start the sell off. As it did.

The correction will however not eliminate the volatility in the market. It will take some time until the markets will move up strongly and decisively. The market will remain cautious as some economic data like the deflator figure, unemployment number, the employment cost index and the costs of durable and consumer goods may lead to an interest rate hike and consequently to some more selling.

The sell off, correction, might be, as mentioned before, be favorable as it punctured the bubble of the very high prices, will dampen the spending of the consumer, will make the effects of an interest rate hike smaller, will create new opportunities and very importantly it will divide the good ICT companies from the bad. As figures and performance will become more important than expectations.

There are now opportunities to buy the most promising and profitable companies at reasonable prices. And this inflow of new money will turn the sell off, bearish mood, into a bull again within four to six months. This will be inevitable as the performance of the economy will remain positive, the good earnings and returns of a large number of companies will remain at the same level as in the first quarter and as the old economy stocks will most likely participate in the next rally. The interest rates will influence the stock market but the consequences will be much smaller than expected. They will create volatility on the short term but they will not influence the market on the medium term, the market, economy, is simply to strong to be curbed at the moment.

The third quarter might deliver a wide based rally with the best of the ICT companies and the majority of the old companies benefitting from the impulse from the booming, world, economy and the advantages of the new economy.

The only disadvantage will be that the future growth of the stock market could and will most likely lead to another bubble, although smaller than the previous one, and will consequently lead to a new correction. As the people will be enthousiastic about the good results and buy into the bull market, essentially creating a vicious circle. Beside the home grown volatility, volatility will also be induced as long as the legal and financial structures in the emerging countries remain unclear and as long as the consequences of the new economy, technological capabilities, are not fully understood and not, wrong or not fully applied at home and abroad.

The future of stock investing

The best way to invest your money will remain the stock market. The largest gains can be made here over the long term. This growth and especially large exceptional growth will lead to tensions and to corrections but they are part of the game. The stock market is a very efficient instrument and will reward good and punish the bad companies but on the long term it will deliver the highest return.

The market will gain the most during periods of an economical boom but this will automatically lead to some very high expectations of some companies which never can be met. Everybody wants to be in the new group and this will consequently make the stocks very expensive, if not to expensive. As such a group, like the ICT stocks at the moment, are part of a revolution in doing business, they will be very vulnerable to high expectations and will become a victim of insecere and even uncapable companies who just want to get their part and cash in.

To avoid the bad stocks and paying to much, stock picking will be the name of the game, especially in a relatively new group like the ICT group of companies. The good ICT companies will continue to improve and become the shooting stars of the market again. Stock picking is an absolute necessity in the volatile market of 2000.

The stock market will receive a boost from the increased attractivity of the old economy companies which continue to deliver respectable returns and those who can make the turn to the new technologies best will receive the largest rewards. This wide based growth will be less susceptible to a collapse and any correction will have a lesser impact. A broad based growth secures a balanced growth and a shortfall, correction, can be made up by the elasticity of the ICT companies which have shown a very big resilience in the last years.

The following ICT stocks will most likely belong to the good group of companies and will therefore deliver above average returns. They are very often the market leader with one or more products, have clear concepts and have the capability to bring good ideas to the market. We have listed some hardware, backbone and productsuppliers with a large internet content who have been succesfull and do possess a large potential. Companies like Lucent, Cisco, Nortel, Qualcomm, Oracle, CSC, CA, AOL/Time Warner, Amazon, Ebay and Charles Schwab. In the tech sector we like Intel, Sun Microsystems, CMGI, Dell, IBM, Texas Instruments, Applied Materials, Red Hat and for the people with the stomach for risk Microsoft. In the communication sector we like Nokia, Ericsson, Motorola, Vodafone, Bell South, MCI-Worldcom, KPN/Qwest and AT&T and its wireless offspring.