- The Washington Times - Wednesday, April 5, 2000

The Nasdaq Composite Index took the stock market on its wildest-ever ride yesterday, swinging by 634 points and dragging down the Dow Jones Industrial Average by 503 points, only to largely recover by the end of the day.

The Nasdaq trumped a record loss on Monday by diving an unprecedented 13 percent in two hours of trading around noon yesterday before recovering just as spectacularly to end off 75 points. The swing was a record for the "new economy" index.

The startling downdraft caused the Dow, which started the day with a 196-point rally, also to lose its composure. It plunged at one point by 700 points and then snapped back to end with a modest decline of 47 points. The swing in the blue-chip index was the largest in a century of trading.

Analysts attributed all the dramatics to an ongoing "tug of war" between "old economy" and "new economy" stocks. In this round of the conflict, the "new economy" technology stocks have been rapidly giving ground to more well-established, tried-and-true stocks.

"The higher they fly, the harder they fall. The technology stocks that performed the best have fallen the furthest," said Dave Powers, technology stock analyst with Edward Jones in St. Louis.

"I think overall what we've seen is very healthy for the market," he said. A more "reasonable" amount of money is flowing into the stocks of established corporations with reliable, steady earnings, and less is being put into Internet and other technology firms that have never even earned a profit.

With profits being postponed further into the future by many popular Internet start-ups, investors have been scaling back on such stocks in stages in the last month, causing a massive sell-off that has knocked nearly 20 percent and 1,000 points off the Nasdaq.

The Nasdaq closed at 4,149 yesterday after a breathtaking dip to nearly 28 percent below its March 10 high of 5,049.

First to get dumped were the electronic retailers such as Amazon.com and E-toys, which disappointed investors with an unspectacular Christmas selling season despite heavy advertising. Then, said Mr. Powers, investors "took out" Web "content" companies like thestreet.com.

The latest Internet stocks to get trampled are companies hoping to profit from business-to-business sales, like Ariba and Commerce One, he said.

"There had been a huge love affair with technology stocks, with individual investors putting the majority of their dollars to work in technology and throwing out the rules of diversification," he said. "If there's any lesson to be learned, it's that diversification still works."

Meanwhile, established technology stocks like Texas Instruments, Lucent and Motorola, which were dragged down by the latest round of selling "look attractive again," he said. "Investors should stick with high-quality companies. They've held up the best and have the best chances of being in business five years from now."

Bargain hunters looking for cheap deals after a two-day rout may have saved both the Dow and the Nasdaq from record losses yesterday. Nevertheless, the Nasdaq, because of cumulative losses including a record 349 drop on Monday, appears to be entering a bear market stage as defined by a drop of 20 percent or more.

Yesterday's midday drop was magnified as investors who borrowed to finance their investments were forced to sell when steep losses prompted their brokers to call in the loans. Such margin calls were running at twice the normal rate at the biggest on-line brokerage, Charles Schwab Corp.

Pierre Ellis, economist with Primark Decision Economics in New York, said he can't confidently say Nasdaq's woes have ended despite yesterday's quick snapback. Since the index soared by an extraordinary 83 percent last year, there may be room for further declines, he said.

"This is not a traditional situation," he said, noting that many small investors who jumped whole hog into technology stocks early this year may be jumping back out because they got burned.

"We are in an environment where the outlook for stocks is going to be volatile," he said. It's not only difficult to judge the value of start-up Internet companies that seem to have great potential but no earnings, but the economic environment is changing, he said.

A constant worry that gnaws away at investors is how much the Federal Reserve will have to raise interest rates to slow economic growth and a consumer-spending binge spawned in part by the wealth created in the stock market, he said.

Adding to the market's queasiness was a federal judge's harsh verdict against Microsoft Corp. on Monday in its antitrust case.

"Microsoft is a bellwether stock that made a lot of people money. Confidence in general may be shaken," he said.

Richard Babson of Babson United, a Boston investment company, said concerns raised by the Microsoft case continue to reverberate through the market, especially among the professional fund managers.

"Microsoft was a bit of a wake-up call. It could be seen as government intervention on the information superhighway," he said.

The high prices of Internet stocks, such as the on-line auctioneer E-bay, are driven by expectations that such dot-com companies will dominate their markets by being the first in the field and using heavy advertising to establish their name brands techniques used by Microsoft, he noted.

"If someone is really successful, does that mean they're a monopolist?" he said. "If this could happen to Microsoft, this could happen to the stock of any tech company that I know for very different reasons. The government is changing the speed limit on the information superhighway."

Similar questions have dogged biotechnology stocks ever since President Clinton declared that the government will release privately discovered secrets of the human genome to the public, he said. "Government involvement could create difficulties if someone is really successful."

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