By Peter McCready Twelve months have passed since the Nasdaq Composite Index peaked and the...
By Peter McCready
Twelve months have passed since the Nasdaq Composite Index peaked and the dot.com bubble burst. Analysts and economists breathed a sigh of relief when the US showed signs that its economy was in for a soft landing rather than a hard one. And then the worries reached fever pitch all over again.
Two weeks ago speculation mounted that the Japanese prime minister was about to resign as the country stood on the brink of a major recession and awaited
the banking system's imminent collapse.
Last week it was the US's turn once again to prompt investors to rush for cover as the Dow Jones Industrials Average Index closed below 10,000 at its lowest level in a year.
Some observers and market analysts claimed that last week's mini panic on the markets was a reaction to events in Japan, but Mick Brewis, a fund manager at Baillie Gifford, said there was more to it than that.
"Tech stocks have been falling steadily since January, and last week the weakness moved to the broader market. It's more a sentiment issue because the US financials have little exposure to Japan," he said.
Confidence in the US market is fragile to say the least, and some investors chose the security of US government bonds, which pushed 10-year Treasury bonds up more than half a point.
Analysts at brokers Gerrard said it was now clear that markets are only reacting to bad news. US consumer confidence is plummeting and the National Association of Business Economics has lowered its GDP forecast to 2%.
But it comes as little surprise that Nasdaq is bearing the brunt of the bad news on company earnings and the prospects at least for the next few quarters are unlikely to improve.
Gerrard said the latest consensus of analysts' earnings expectations is for growth of around 4.5% for this year. The likelihood, however, is that this will be revised down to expectations of no growth at all.
Baillie Gifford's Brewis said: "The main issue is slowing profits growth on the back of a slowing economy, and the main question is: is the economy slowing or going into a recession?"
Across-the-board profit warnings, particularly telecoms, are beginning to appear as the quarterly results season approaches. Those companies with bad news for the quarter ending this month are making their pre-announcements now.
Compaq Computer, the biggest PC maker, said it would earn less than expected in the first quarter because sales have decreased. And database software specialist Oracle's management said it would be unable to predict financial performance in the shaky economic environment and guided flat profits for the fourth quarter.
Chipmaker Sandisk said quarterly revenue and profit would be "significantly lower" than forecast, and network switch maker CoSine Communications expects a wider than expected first-quarter loss.
The latest economic data haven't helped matters. The number of workers making fresh claims for unemployment benefit has remained stick at a high level this year. And at 4.2% in February, unemployment is at its highest since September 1999.
The manufacturing sector has been hit hardest. Although overall another 135,000 jobs were created, factory employment dropped for the seventh consecutive month.
In two months alone, factories lost more jobs than in the whole of last year. Consensus expectations point to further significant increases in lay-offs and redundancies over the next six-months.
Cisco Systems, the biggest maker of networking equipment said it would shed 5,000 jobs, and chip maker Motorola said it would cut 7,000.
But there is some positive news. So far the housing market is remaining buoyant, and Baillie Gifford's Brewis said that with inflation under control there is still scope to further cut interest rates and taxes.
These cuts should boost confidence as well as adding to buyers' spending power. The confidence and monetary issues are very important, but it's an open question whether consumers will spend their gains or bank them.
But more profit warnings can be expected, particularly in the telecoms and technology sectors where demand is slow and there is overcapacity.
Brewis said Baillie Gifford's analysts think that the profits of companies in the S&P500
Index could slip into negative territory as opposed to the 5% growth currently predicted and advises obvious caution in stock selection.
Hence Baillie Gifford is investing in cigarettes, bourbon and chewing gum through Philip Morris, Brown Forman (which makes Jack Daniels) and Wrigley.