Over the last few years, prices for technology stocks have soared. But recently, they've taken a real drubbing. During the week of April 10 alone, the tech-heavy Nasdaq composite average plummeted more than 1,100 points. Why is this happening?
The explanation most often proffered is that tech stock prices climbed way too high, driven by what Federal Reserve Chairman Alan Greenspan called investors' "irrational exuberance." Internet firms in particular achieved stratospheric valuations - even though most have never earned a profit.
In reality, stock prices are not a measure of investors' insanity but of their confidence in future profits, tempered by the law of supply and demand. There are no "correct" stock prices.
However, we can explain why tech stocks reached the sky last year. The last two decades have witnessed the creation of four entirely new industries: personal computers, biotechnology, mobile phones and the Internet. Many thousands of investors, not to mention employees with stock options, have made personal fortunes. Stock prices also skyrocketed because corporate profits are growing faster than ever. And the Internet has not only made it easy for individuals to buy and sell stock, it has made it easy to identify publicly traded companies with significant growth potential.
The recent decline in high-tech stock prices can also be explained. Investors' faith in the Clinton administration, which many once believed to be pro-business, has been damaged. The impending breakup of Microsoft, the tobacco industry shakedown, and threatened actions against the insurance, pharmaceutical and health care industries are among the obvious examples.
Investors are starting to pick up other negative signals.For example, in treating Cuba's communist regime as a nonissue during the Elian Gonzalez custody battle, the Clinton administration may appear to some investors to be thumbing its nose at business.
It is also finally dawning on investors that tech industries often pay exorbitant prices to avoid new regulation. If the Clinton administration leaves a legacy, it will be its zeal for grabbing a piece of the action. There are gazillions of dollars being made by holding spectrum auctions, levying fines on unpopular companies and trading favors for campaign contributions.
Investors haven't suddenly lost faith in technology. But they are beginning to have doubts about the technology investment climate. Unfortunately, it isn't just stock market investors who will suffer. Companies with new technologies that make our economy go round depend on initial public offerings for cash infusions and strong stock valuations to acquire resources they couldn't afford to pay for in cash.
Instead of spooking investors, our government should be trying to bolster confidence. Given the present cast of characters, I wouldn't hold my breath.
Brodsky is president of Datacomm Research Co. in Chesterfield, Missouri. He can be reached at ibrodsky@ datacommresearch.com.