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Was it panic or predictable? Or is the continuing unpredictability of the U.S. economy creating panic in the market, especially in the technology sector? Those were the questions roiling the market Jan. 22 after tech bellwether stocks stumbled coming out of the gate but began stabilizing later in the day.
“Frenzy feeds off itself,” Eric Openshaw, vice president and national sector leader for technology at Deloite Touche USA, told eWEEK. “I think we’re seeing a lot of U.S. investors reacting to U.S. market trends.”
While the U.S. economy has slowed in recent months due to what Openshaw calls the “subprime debacle,” the tech sector has maintained the collapse of the mortgage and housing markets would have little or no effect on tech stocks.
But the Jan. 21 global market sell-off when the U.S. market was closed on a national holiday prompted U.S. investors to dump tech shares Jan. 22, even after an emergency interest rate cut by the Federal Reserve Board.
“Vis-??Ã-vis the global market, there will be aberrant swings – either way — in the U.S. market,” Openshaw said. “These are short-term trends.”
The trend Jan. 22 was to sell. In mid-morning trading, Google was down more than $20 per share in a 3.3 percent slide to $579.44 a share. By mid-afternoon, Google rallied to $588.14 a share. Microsoft fell almost 3 percent to $32 a share after the opening bell but nominally rallied to $32.08 after the Fed rate cut was announced.
Intel plunged in the opening hour of trading but began stemming losses in afternoon trading. Cisco’s shares, though, fell early by 3.2 percent and continued falling to 4 percent to $23.21 a share.
Telecom stocks followed the same trend with an early morning plunge followed by a modest rally in the afternoon.
Looking Ahead
“The global demand for technology will be fairly robust in the next 18 months,” Openshaw predicted. “I think tech stocks will continue to do well and bring the stock prices up with it.”
Standard & Poors agreed with Openshaw, issuing a strong buy opinion on Microsoft, eBay, AT&T, EMC and eBay. S&P issued a hold opinion on Yahoo, which is rumored to be considering layoffs.
“As it reports what we expect will be strong fourth-quarter EPS [earnings per share] this week, we anticipate AT&T will give greater commentary on the trends it expects to see in 2008,” S&P predicted. “We expect that wireless and DSL growth will be drivers for revenue, offsetting impact of cable competition, and see incremental cost savings from merger synergies helping operating margin expansion.”
Just minutes after the market opened, the Federal Reserve Board voted to lower its target for the federal funds rate 75 basis points to 3.5 percent. The Board also approved a 75-basis-point decrease in the discount rate to 4 percent.
It was the first rate cut between regularly scheduled Federal Reserve Board meetings since Sept. 17, 2001, the first day the markets reopened after the Sept. 11 terrorist attacks.
According to a statement by the Federal Reserve Board, the emergency rate cut came in “view of a weakening of the economic outlook and increasing downside risks to growth. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”
In a Jan. 22 morning speech to the U.S. Chamber of Commerce, Treasury Secretary Henry Paulson said, “I continue to have confidence in the underlying strength of the global economy.”
Nevertheless, Paulson added, “The U.S. economy is experiencing a significant housing correction. This was inevitable after years of unsustainable home price appreciation, and it is exacting a penalty to our economic growth. That, coupled with high energy prices and capital market turmoil, has caused our economy to slow materially in recent weeks.”