Late in the day on Monday, Morgan Stanley Dean Witter came out with a report saying the U.S. economy is almost certainly already in a recession, and that negative growth will continue for the next couple of quarters at least. Then on Tuesday morning, cellular phone giant Nokia reported lower than expected results, and on-line retailing behemoth Amazon.com's quarterly forecast also came in below some analysts' expectations.
So what did the markets do? The Dow Jones Industrial Average and the Nasdaq market index both jump right out of the gate, with the Nasdaq up 80 points in the early morning despite several downgrades of Amazon, a Nasdaq benchmark. The Dow lost a lot of its early steam by midday, as the R-word hit some financial and consumer stocks, but the Nasdaq managed to stay positive, even though Yahoo joined Amazon in the downgrade column.
Could it be that some or all of the negative news on technology - and even the risk of the R-word - has been factored into stock prices already? If a report like Morgan Stanley's had come a few weeks ago, the Nasdaq would have headed south with a vengeance. Put that together with downgrades of Amazon and Yahoo and the tech sector should have lost substantial ground Tuesday. Instead, it not only started out on the positive side, but managed to stage a couple of respectable rallies during the day.
"This morning we came in and heard the news on Nokia and we said that's the end of yesterday's short-lived rally, but it seems that there are some people out there that have some money to spend," Ned Collins, head of trading at Daiwa Securities America, told Reuters. "Some people do believe that we have a low in place." If anything, the Morgan Stanley report seemed to confirm that the Federal Reserve will likely lower interest rates again, which could help the U.S. economy return to its growth path.
Amazon.com told the story: the company said fourth-quarter sales would come in at more than $960-million (U.S.), up more than 40 per cent from the same quarter last year but at the low end of forecasts, which were in the $950-million to $1.05-billion range. The company's gross margins are expected to be 21.9 per cent, more than 1 per cent below targets.
In a client note, Prudential Securities called the results "nothing to write home about." Salomon Smith Barney, Robertson Stephens and Goldman Sachs downgraded the stock to "outperform" or "market perform" from "buy," while Lehman Brothers called the results "disappointing." Robertson Stevens said Amazon's stock "could continue to decline... while the company continues to try to demonstrate a clear path to profitability."
And the stock? It was up by over $1 or more than 6 per cent at one point in the day, to $16. Sure, that's 80 per cent lower than it was early last year, but that means it has actually held up pretty well compared to some other Internet-focused stocks in the past year. Yahoo was also cut to a "hold" by ABN Amro, which cited the company's "greatly diminished prospects for growth" and said it no longer deserved to trade at a premium. The stock was up by more than $1.50 or over 5 per cent late on Tuesday.
Even technical analysts say the Nasdaq looks to be getting oversold, with the index more than 30 per cent below its 200-day moving average. Several analysts told Reuters that the Nasdaq has only fallen more than 20 per cent below its 200-day moving average three times, and each time it followed that with a strong rally. The number of falling stocks and the number hitting new 52-week lows have also declined, analysts say.
Yesterday, investors seemed to be firmly behind market bulls such as UBS Warburg chief market strategist Ed Kerschner, who said this is "one of the five cheapest markets I've seen in the past 20 years." The Wall Street veteran said Tuesday that in his view, investors are "going to find that the P/Es you're buying today, many of which are half where they were just two or three months ago, are extraordinary opportunities."