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Expert Insight Analyst says bull market continues despite technology bubble by Scott Burns Reprinted with permission of the Dallas Morning News. |
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Scott Burns joined The Dallas Morning News in 1985 as
a business columnist after a stint at the Boston Herald as
a financial editor.
He has been a contributing editor to Worth Magazine; and his articles and columns have appeared in numerous publications. His books include Squeeze It Till The Eagle Grins and Home, Inc., The Hidden Wealth and Power of the American Household. Burns graduated from the Massachusetts Institute of Technology with a degree in humanities and biology. |
James Bianco says we’re not in a bear market.
In spite of that, he is located on this planet. Bianco spends his time at Arbor Trading in Chicago and works with the Leuthold Group in Minneapolis. Indeed, it’s his market analysis work that brings him to the conclusion that we’re not in a bear market. A bear market, according to the rulebook, is a period when stock prices decline by 20 percent or more in a year. By that measure, we’re well into a bear market. The Standard and Poor’s 500 index has been off by more than 20 percent for weeks. The Nasdaq is off by more than 60 percent from its March 2000 high. Trillions in market value have been lost. Happy investors are an endangered species. So how does Bianco come to his conclusion that we’re not in a bear market? Writing to institutional clients in mid-March, he described what we’re in as "the 80 percent Bull Market," demonstrating that losses were almost entirely in the technology sector. Technology comprises less than 20 percent of the total capitalization of the S&P 500 index. The other 80 percent is doing well. So well, in fact, that nine of the 11 sectors in the Standard and Poor’s 500 index have shown gains over the past 12 months (see chart).
Instead of being broad and inescapable, as genuine bear markets are supposed to be, this bear market could be escaped simply by being underinvested in technology and communications rather than overinvested. If you were a mutual fund investor, for instance, this means you did poorly if you were in the aggressive growth funds that tend to have big technology commitments. But you did relatively well if you were in conservative, value-oriented funds that tend to have small technology commitments. Skeptical? I don’t blame you. Just to check on how this worked out in mutual funds, I went to the Morningstar database and found that funds investing in large value stocks provided a 14.36 percent return in the 12 months ending Feb. 28. Part of this performance came from their below-average commitment to technology stocks, a mere 11.4 percent on average. During the same period, large growth funds lost 25.96 percent, largely due to their 35.7 percent commitment to technology stocks. Now take a look at Bianco’s figures showing S&P sector returns from March 10, 2000 to March 13, 2001. S&P 500 technology was down 58.33 percent, followed by a 38.26 percent loss for communications. But utilities were up 45.42 percent, and transportation was up 35.83 percent. Nor do things change much when you add the S&P 400 mid-cap stocks and the S&P 600 small-cap stocks. Include them, and things were still dismal for technology and communications. But they were close to spectacular for almost everything else. Bianco’s radical conclusions? First, the bull market is still intact, provided your investments aren’t in technology. Second, losses in technology stocks (and the funds that invest in them) have been so steep, most shareholders probably won’t sell because there would be no point in it. Instead, they’ll hold their depressed shares and treat them as "lottery tickets" on a resurgence in technology. That means, he says, less turmoil and a chance that selling won’t spread to other sectors. Whatever happens, this is clear evidence that we’ve just been through a major bubble in technology stocks. |
| Mr. Burns is not affiliated with, or compensated by U.S. Global Investors. |
