Will it last? The Fed’s surprise interest rate cut jerked the Dow out of the red and gave the Nasdaq a big kick in the butt. Tech stocks that barely dragged their sorry selves into the New Year were suddenly busting out all over.
And the big boys posted even bigger gains. IBM (IBM) spurt up $9.81 to $94.63. Fiber-optic maker Ciena (CIEN) gained $19.06 to $84.94. Even PC stocks — a sector panned last month by Lehman Brothers because of low demand — soared. Dell (DELL), for example, rose $2.50 to $20.
But was Wednesday’s tech stock rally ephemera or is this tech revolution take two? Analysts’ reactions were mixed.
“This is terrific news for technology,” said Fred Siegel, president of Siegel Group Inc. “Now the old economy will have more money to buy the new economy, which will help profits over the next six months.”
Rumors that the Fed will slash rates even further when it meets at the end of the month have fueled theories that Wednesday’s rally is just the tip of the iceberg.
“Clearly the Fed’s rate cut is a good first step toward re-energizing consumer confidence in a stable economy, which almost invariably drives the tech sector up,” said Tim Bajarin, principal analyst at Creative Strategies. “The rate cut moved things in a positive direction and we’re going to be watching this very closely over next few weeks to see if there is more good news to come.”
Some analysts urged investors to stay calm. After all, it’s not like Wednesday’s upturn in stocks came as a result of technology companies suddenly reporting profits.
“Strength depends on earnings, and most companies don’t start reporting their first quarter profits until mid-January,” said Megan Garham-Hackett, director of technology research at Standard & Poor’s. “The length of the rally will depend on those earnings reports.”
Others warned that Wednesday’s spike may just be one sunny day in an otherwise gloomy forecast.
“We do not think the downturn in technology profit growth is over,” said Steve Milunovich, a global technology strategist for Merrill Lynch, in a faxed statement. “We believe the rally in technology may not be sustainable and could prove to be an opportunity to take profits in certain sectors.”
Which basically means, in analyst-speak, that investors may want to consider cutting their losses and get out while the getting’s good.
So what about dot-coms? Although many posted gains on Wednesday, Siegel said consumers are still jittery about real profits in virtual offerings.
“I think the dot-coms will rebound at some point but they still have to get their business plans together,” he said. “Right now that’s an area that investors look at as a mine field. You really have to know what you’re doing to invest there.”
It’s hard to know if the burst of enthusiasm is just that –- a burst before another bust.
In the words of Lou Mazzuchelli, vice president and personal computer analyst at GerardKlauer Mattison:
“It’s a great day. But one day does not a year make.”
Wired – Jan. 4, 2001