Wall Street ended the millennium with an appropriate flourish on Friday, as major stock indexes closed at record highs amid signs that the feared Y2K bug was a no-show.
But investors worldwide had basically been saying as much for months: The spectacular 1999 gains in equity markets from New York to Athens to Singapore were a strong vote not only for a smooth transition to the new millennium, but also for a booming global economy in the new year.
Technology stocks, of course, were the driving force in the U.S. market in ’99. Ravenous demand by large and small investors alike for shares of semiconductor, software, Internet and telecommunications issues drove the Nasdaq composite index up 85.6% for the year, the greatest calendar-year advance of any major stock index in U.S. history.
The previous record: The Dow Jones industrial average’s 81.7% surge in 1915.
In a shortened trading session on Friday, while both the Nasdaq index and the Dow ended at new highs, the 28-year-old Nasdaq again showed the 103-year-old Dow who’s in charge now: Nasdaq jumped 32.44 points, or 0.8%, to 4,069.31, while the Dow rose half as much in percentage terms, adding 44.26 points to 11,497.12.
Still, the blue-chip Dow’s 1999 advance of 25.2% beat the broader Standard & Poor’s 500 index’s gain of 19.5%, thanks in part to Dow Jones & Co.’s decision to take a page out of Nasdaq’s book and add tech giants Intel Corp. and Microsoft Corp. to the 30-stock index on Nov. 1.
Microsoft has since zoomed 26%; Intel has risen 8%.
Many smaller technology stocks also have been red-hot in recent months, a factor in pushing the Russell 2,000 small-stock index this week to its first series of record closes since April 1998.
On Friday, the Russell jumped 1.6% to a new high of 504.75.
Some traders said that suggested bargain-hunters were snapping up depressed smaller stocks, hoping for a “January effect” bounce--a surge in shares that had been beaten down at year-end by tax-related selling.
But that kind of bargain-hunting would have to be dramatic to bring many U.S. stocks into the bull market that tech stocks have enjoyed over the last year in particular.
Indeed, a question raised over and over on Wall Street in 1999 was: Whose bull market is this, anyway?
On Nasdaq, for example, nearly half of that market’s 5,000-some stocks actually declined in price in 1999, even as the Nasdaq composite index zoomed.
A major problem for many stocks, though obviously not the tech sector, was the ongoing rise in interest rates. The Federal Reserve raised short-term rates three times during the year (in June, August and November), citing concerns that the U.S. economy’s tremendous growth rate might boost inflationary pressures.
That made for sheer misery in the bond market: Bond values plummeted as the yield on the bellwether 30-year Treasury bond soared, closing 1999 at 6.48%, highest since late 1997 and up from 5.09% at the end of 1998.
On a total return basis--counting interest earned, then subtracting the net loss in principal value--the Vanguard Long-Term Treasury bond mutual fund lost 8.1% for the year.
Who could blame investors who gave up on bonds altogether and joined the tech-stock stampede?
Interest rates also rose across Europe and in parts of East Asia as the global economic recovery gained steam.
Higher rates, as expected, wreaked havoc with traditionally interest rate-sensitive stock groups, including banks, insurance companies, home builders and utilities.
The Dow Jones utility stock index slumped 9.3% for the year. The Nasdaq bank stock index slid 8%.
Assuming the Y2K computer bug remains only an annoyance, at worst, to the world economy, many experts believe the Fed is poised to tighten credit further in 2000, probably as early as February.
But would that matter to the roaring tech and telecom sectors, even with stock price-to-earnings ratios at levels never before seen in the modern market?
Though many investors may have already forgotten, the tech sector last summer demonstrated just how much downside there can be in richly valued stocks.
Many Internet-related stocks, after peaking last spring, fell 50% or more by early August, wiping out billions in market value and panicking many investors into selling--at exactly the wrong time, in many cases.
The Net sector then turned on a dime and roared again in late summer and into autumn. For the year, the Interactive Week Internet stock index soared 168.3%.
With the heated action in many tech issues worldwide over the last two months, analysts have run out of superlatives to describe the phenomenon.
The cult stocks of the end of one millennium--and the beginning of another--include wireless technology titan Qualcomm in the United States, consumer electronics giant Sony Corp. in Japan, cellular phone leader Nokia in Finland and Internet content company China.com in Hong Kong.
The market’s bulls say there’s a fundamental basis for these stocks’ gains: technology is the future, after all; and many of these companies unquestionably boast the best growth prospects of any businesses on Earth.
The market’s bears say this is like any other investment mania in history, only worse. It can only end in a crash of stock values, they say--at least for the tech sector, and possibly for the broader market.
If that happens, it will be brought to the world in living color on the largest video screen in the world: Nasdaq’s newly opened MarketSite Tower in the heart of New York’s Times Square.
