(March 9) “Is it still a bull market if it is running on only one leg?,” asks Gretchen Morgenon in today’s New York Times.
“That is the question investors are asking now as they ponder a badly bifurcated stock market, where a handful of strong stocks is surrounded by a mass of the weak.
While most bull markets are built on strong performance from a wide swath of industries, gains in the current market are being made in technology stocks alone. Procter & Gamble’s profit warning on Tuesday only served to cement the view among investors that anything nontech is a nonstarter.
“Although it is not immediately evident from the behavior of the broad market indexes, most shares are currently trading at bear market levels. While the Standard & Poor’s 500-stock index is down about 7 percent for the year, more than three-quarters of the stocks in the index are down 20 percent or more from their recent highs, according to Salomon Smith Barney.
“Even more surprising is data compiled by James Paulsen, chief investment officer at Wells Capital Management in Minneapolis. Paulsen found that if he excised the 66 technology and telecommunications stocks from the S&P index, the 434 companies that remain are currently trading at the same low levels seen during the Russian debt crisis of 1998. With technology and telecommunications back in the index, it is up approximately 40 percent since then.
“In addition, Paulsen removed technology stocks from the S&P index and found that the price-to-earnings ratio on the median stock in the index currently stands at around 12. That is the same depressed level reached on the entire index during the recession of 1990. With technology stocks included, the index’s price-earnings ratio is 43. ‘The story here is not just how well tech is doing,’ Paulsen said. “The story is equally that most everything else is doing so poorly. I think it would surprise people that outside of technology, the United States’ blue-chip stock market may break down below the lowest point of the Asian crisis.’
This lopsided action in stocks is both unusual and confusing. For example, stocks in many sectors — banks, consumer durables and basic materials — are trading at depressed levels that historically have foretold a recession. But the economy is so hot that Alan Greenspan, the chairman of the Federal Reserve, is threatening to raise interest rates again later this month. Meanwhile, technology stocks behave as though they are completely immune to the ill effects of rising interest rates, hardly a realistic assessment.