How Tech Saved the Dow

Conventional wisdom says the sector that led the last economic boom will not be at the vanguard in the next economic upturn. However, the high-tech industryseems to be turning that wisdom on its proverbial head.

Many technology company stocks have soared in the past year, pulling the sector as a whole out of the doldrums and driving a significant increase in the value of the Nasdaq and Dow stock exchange indexes.

However, even investors with a fondness for tech stocks may be jittery after the fluctuations of years past, and many are cautiously waiting to see if this is truly a tech rally or just a minibubble about to pop.

Could the sector that collapsed first in the bust also provide the spark that starts the next economic boom?

Rally Flags

The recent stock market rally began with an upbeat earnings report in October from Intel. Since then, optimism has abounded about tech-sector prospects, garnering investor interest.

With only a few hiccups, the news has continued to be good. The Dow hit an 18-month high on December 12th, rising to 10,042. Analysts and market watchers have agreed that tech stocks have been the biggest winners this year, with the Nasdaq index rising a remarkable 74 percent from October 2002. Among the companies that have made Dow watchers so optimistic are Microsoft, IBM, Adobe Systems and Verity.

The market’s overall direction is not always up, however. Tech stocks made some big gains on Tuesday, December 16th, only to take some significant hits the next day. Among those taking it on the chin were Nokia, Ericsson, Motorola and Texas Instruments.

This sort of back-and-forth progress may not be a bad omen, but merely a step in a return to normalcy. Both the Dow and the Nasdaq are in a process of righting themselves after a hard hit. As Prudential Securities market analyst Larry Wachtel told the E-Commerce Times: “It’s simply a snap back. When you look at the decline during that three-year period, the major decline was in technology.”

History Repeating Itself?

The dot-com stock highs of the recent past may have made it seem as if the market is unpredictable in its peaks and valleys, but those who watch the stock market regularly are not surprised that the tech sector is riding high right now.

“It’s one of the fundamentals of the tech sector, and it’s what happens in any market recovery: You gamble on tech early,” Morningstar analyst Todd Bernier told the E-Commerce Times.

Rather than saying tech is saving the Dow, Bernier noted that the rise in tech stocks is merely a symptom of market recovery. In other words, the market is rising, and tech is demonstrating that, rather than causing it.

“The reason that the tech sector leads a recovery is that as soon as capital spending increases, companies spend money on technology,” he said. “They only spend if they’re doing better, and the market reflects that.”

Money in the Market

Unlike in the dot-com glory days, when tech stocks were wildly overvalued, this rally might be more solid because it reflects increased spending rather than pure speculation.

Also, not every player in the sector is part of the Dow’s rise, which makes the turnaround more realistic in terms of what investors can expect. For example, telecom and semiconductors are still down.

“The rally could sustain itself, or it could top out,” Morningstar equity strategist Mark Sellers told the E-Commerce Times. “But eventually stocks are going to have to come back, and that’s what we’ll see over the next couple years.”

For his part, Bernier noted that “what’s mainly driving capital spending now is government spending. A lot of tech companies have had huge injections from the government.”

Also, beyond state and federal spending, many technology companies have built up inventory heading into the fourth quarter — and if product quantity and consumer demand match up well in December, the Dow could reflect that.

Taking Stock

Investors still may want to remain cautious, but some areas could bear watching for those who want to partake of the market rebound while avoiding excess risk. Bernier pointed to the large corporate migration toward notebook computers as a trend to track, along with the increasing rate of replacement of older machines.

Investors also may want to place more faith in the big guns. In the last boom, it seemed startups ruled the market, but this time around, major players are leading the way.

“You look at the vendors that have done well this year, and it’s the big guys,” Bernier said. “Oracle, SAP, vendors like that. As they find new audiences and refocus on new areas, it’ll continue to have an effect on the market.”