AFTER THE STORM - Are Tech Stocks on the Road to Recovery?

The stock market's dominant theme last year was the sharp decline in value experienced by many technology issues. The NASDAQ Composite Index, considered the tech sector's barometer, tumbled 39.3 percent in 2000. This stands in sharp contrast to 45 percent and 88 percent gains in 1998 and 1999, respectively.

Many companies that are considered part of the tech sector, including those whose businesses are based largely on Internet commerce, declined sharply in price during the year, bringing to an abrupt halt the euphoria in which many investors reveled. To see much of this sector's value washed away has left many people shaking their heads and asking what happened? And can the tech sector recover?

Thomas Larsen, Executive Vice President, Mutual of America Capital Management Corporation, pondered the year's events as December drew to a close. During the market's meteoric ascent, he tempered his optimism, and now that it has come down to earth, he finds little that surprises him in the manner in which events unfolded.

"The growth of technology, the power of the Internet and all of that is very, very real," said Larsen, who is responsible for managing several equity portfolios under separate account contracts. "The fundamentals definitely were there and are there, but everything in the stock market gets overexploited at some point, even very powerful fundamentals like those that existed in technology."

As any economics student knows, the law of supply and demand rules. Investors were demanding to buy into technology and soon enough the supply of tech-related issuers had ballooned to try to slake this seemingly unquenchable thirst.

"Because those fundamentals were, in fact, so powerful and so attractive, they became more overexploited than you would normally experience in a regular stock market phenomenon, so valuations became much, much too high," Larsen explained. "There were too many companies that were financed in their venture stage and were allowed to come public. Capital markets made too much money available. Expectations on the part of investors, insofar as growth rates were concerned, were unsustainable. And all of this is a natural accumulation that occurs with success. The more success you achieve, the more you begin to believe it is the norm, the more you begin to believe it is sustainable in the future."

Larsen said that eventually an event or two reminds investors of their excesses, and the mad scramble for the exits ensues.

"In this case, the event was the Fed raising rates enough so that it began to have an effect on the overall economy," Larsen said. "The stock market began to roll over, because the early signs of an economic slowdown became apparent. And that soon began to show up in earnings announcements, in earnings comparisons, and from there on it just snowballed. All of the excesses that were built up, and they were considerable excesses, are all being scrubbed down. The process is going to take quite awhile."

Just how long might "quite awhile" translate into?

"I don't want to seem alarming here," Larsen cautioned, "because it need not work this way, but remember that the last tech boom was in the early 80s, with the introduction of the PC, a truly revolutionary phenomenon. Tech peaked out in 1983 and did not come back and outperform the Standard & Poor's 500 again until 1992, nine years later."

Larsen added that throughout those nine years there were buying opportunities in the tech sector, but that these weren't long-term buy and hold relationships. Buy and sell as quickly as possible was the order of the day.

"In 1992, technology began to outperform again and rolled over four years later in the fall of 1995," Larsen said. "It did not pick up again until three years later in the fall of 1998. Some would argue that the 1990s were one big tech cycle. Whether you break it into one or two cycles, the fact remains that when technology rolls over, it doesn't roll over for nine or ten months, it can roll over for nine or ten years. Or in the mid-90s, as was the case, it rolled over for three years.

"So this phenomenon can go on for awhile," Larsen said. "I'm not going to predict how long. There will be rallies during this time period. This market needs a rally now. But it will only be a rally before this whole thing is washed out."

Speaking of technology as we are in broad terms, Larsen hastened to add that another approach to the industry might be worth the trouble.

"Technology is now truly big business," Larsen said. "There are lots and lots of different pieces and subindustries in tech that never used to exist. And it is possible that some areas can do considerably better than others."

He suggested that telecommunications services companies might be prime recovery candidates. "There are portions of telecommunications budgets that, even though they are slowing, are slowing from 100 percent growth rates to 50 percent growth rates," Larsen said. "And that suggests that that kind of a group may be among the first to bottom out, because even if you're slowing to 50 percent, that's still pretty fast, and it doesn't take very much growth at a 50 percent annualized rate to grow out of some of your problems."

Finally, world events will also bear on the ebb and flow of tech stocks.

"Technology itself is less than 10 percent of Gross Domestic Product," Larsen said. "However, it's a very important 10 percent, because it's become half of capital spending and it's responsible for as much as 70 percent of our productivity gains. And so, when the overall economy begins to slow, capital spending tends to slow. And since technology is half of capital spending, all of that really just leverages right down on technology, which has become much, much more sensitive to macroeconomic factors than it ever has been.

"Twenty years ago, macroeconomic events were never truly important. It was always product cycles, company specific events. Now you cannot avoid macroeconomic phenomena when you're thinking about technology. These companies do not control their own destinies, the way they used to."

So, in the final analysis, Larsen has this to say to all those investors who have their crosshairs aimed squarely at the tech sector, awaiting the next boom.

"It's time for investors to remember that the world is full of things besides technology, that ours is a very large and diverse economy," he said. "There are other exciting things going on. Equity returns over the longer run are only 10 or 11 percent, they're not 20 or 30. You can earn that better-than-average return of over 10 percent in lots of different spaces out there. And I think investors who are actually looking beyond technology for the next year or so are going to be rewarded."

The articles and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. Consult your attorney, accountant, or financial or tax advisor with regard to your individual situation.

Mutual of America Life Insurance Company is a Registered Broker-Dealer.