Economists are concerned that declining technology stocks will lead slowing economies into recession Donna Block in New York After 10 years of a bull market – which some thought would never quit – the bears have finally busted out and are mauling Wall Street. The question is: will the New Economy’s technology boom, which drove markets to lofty heights, not only in the United States but around the globe, bite back? Watching the stock market this week could make one think so. Big companies such as IBM, Yahoo!, and Intel have either posted disappointing earnings or warned of trouble down the road. And “The Street” has hammered them. The Dow Jones industrial average breached 10 000 for the first time in seven months and is down 13% from its high for the year.
As bad as that is, things are a lot worse for the Nasdaq, which is dominated by tech stocks. It’s off more than 35% from its peak and is at a new all-time low for the year. To add insult to injury there’s also been the threat of war in the Middle East, which caused already high oil prices to spike near $40 a barrel, and a declining euro is giving investors even more worries. Adding to the pressure in financial markets are fears that consumer-level inflation grew last month above market expectations. Investors have become increasingly fearful that a slowing economy will take a bigger- than-expected bite out of corporate revenues in the future and that spending in New Economy companies, although still robust, will slow to a crawl. Tech spending has accounted for 25% to 30% of overall growth in the nation’s gross domestic product during the past five years, up from just 5% a decade ago, according to the US Department of Commerce. Moreover, after watching the spate of bad earnings reports – which are now afflicting the tech giants and not just the one-hit dot.coms – economists are becoming increasingly concerned that a tech slowdown will help lead the slowing economy into recession.
One industry observer noted that if steep oil prices and interest-rate hikes continue to cool the economy there will be less money for consumers to spend on computers. “You’ll see lost revenues for PC makers and dot.coms will have less money on advertising, and that loss of advertising revenue has been scaring investors to death,” he said. “Businesses, which spent wildly a year ago to prepare for Y2K, are not going to be making any big investment in information technology. And the next thing you know there is talk of recession.” Nevertheless, economists agree that in this new-fangled economy no one really knows what a tech-heavy recession looks like or what to really expect. “I think a lot of the old rules are pretty useless in this new era,” said one industry analyst. A close look at the year’s tech carnage, however, suggests that investors aren’t giving up on tech stocks just yet. They are starting to pick and choose and appear to prefer infrastructure to the ether. Dot.com spending is down. Internet sectors like E- commerce and software have been hit the hardest, falling close to 60% from their highs for the year. Telecommunications equipment firms are down 40%, while semiconductor firms are off less than 30%. And, while the so-called tech wreck is unique to markets in the US and Europe, it is having a knock-down effect on financial markets everywhere. South Africa and the emerging markets are no exception. “It’s driving up the risk profile of investors, and that will have a serious effect on emerging markets,” said one Africa watcher. “Investors are not going to be risking funds in South Africa; they will be more likely to take their risks in non-emerging markets.” But the tech sell-off is only one of the problems facing South Africa. The continued slide in the rand, which dipped below R7,70 to the dollar this week, and the political and economic problems facing Zimbabwe have also contributed to the investor stayaway. The All Share Index on the Johannesburg Stock Exchange has taken a beating, falling to 7 793 late Wednesday from 8 025 the previous week. While some analysts think the market has yet to capitulate, there are those who say tech will continue to be an increasingly important engine for growth, even if it causes the market to stumble now and then. So sit back and enjoy the ride.