US market Forecast

The year 2000 was a tough time for the technology sector. Could 2001 deal the sector a better hand? Michael Wilson takes a look at what’s in store

Relax, the panic’s over. The Wall Street Journal has confirmed it, so it must be true. The US economy is set for a soft landing in 2001, the outlook for interest rates is getting better and technology stocks are poised to regain their rightful position at the top of the investment tree.

Hurrah, we’re all saved.

Maybe this is nothing more than a churlish reaction to the sheer restless hyperactivity of the tech sector in the last few months, but would it be very rude of us to ask exactly what the industry pundits mean by all this roof-raising stuff? How, exactly, does a soft economic landing in the US imply a revival in tech stocks worldwide?

Do the analysts think, for example, that US consumers will feel more free to go out and buy computers, MP3 players and Dreamcasts, now that the awful prospect of higher bank rates has been successfully fended off? Or is it that they’ll spend more time on the phone and play more games on the internet than they did last year? Then again, perhaps it’s the thought that companies the world over will now breathe a sigh of relief and say ‘wow, thank goodness that spell of anxiety’s over. Now we can go out and order that new software that will transform our business in 2001?’ (Doubtful, you have to admit, because if the software was so very essential to their survival they’d have bought it last year regardless of its cost.)

US Market Forecast - The Probability

No, the probability is simply that stock market mechanisms are responsible for all this optimistic talk about the coming tech revival. No amount of bullish talk on the economy, either in the US or anywhere else, will change the fact that internet-based consumer businesses are chomping through their start-up capital at up to four times the speed of their actual sales. (Sales, incidentally, not profits.) And nothing is going to change the fact that consumers are getting bored with the click-through advertising banners that form the entire economic models of top-ranking web properties like Yahoo!.

Instead, what makes the crucial difference is the fact that certain national stock markets, especially in Germany, Japan and the US, are so heavily dependent on technology companies that no fund manager with any sense is now going to jeopardise his Christmas bonus by going seriously underweight on technology in 2001.

US Market Forecast - Tech Stocks

So are we saying that the tech boom is just a myth that’s being supported by a sort of mass collusion on the part of the financial markets? Well, maybe we are. But if we’ve learned anything in this column over the last five years, it’s that there’s more to this investment business than merely slaving over the fundaments. You can miss a lot of very good business opportunities while you’re sitting in your garret shouting “humbug!”. And you look very foolish afterwards.

US Market Forecast & The Aplogists

But unfortunately this absence of tried-and-tested business patterns also deprives us of our most reliable tools for measuring the worth of a tech company. When it doesn’t have a profit line, and hence a p/e, it’s hard to get a handle on its viability or its efficiency. When it issues huge volumes of options to its staff and its backers, we’re always left guessing as to whether these options represent a real dilution of the company’s equity (as they normally would) or just a token gesture to the markets that the company is serious about growth.

In short, there are good reasons why the volatility of these companies should have become so extreme. On the one hand, we all know that the winners will inherit the earth. On the other hand, we know that the majority will quickly fall by the wayside as their funds run out. We need to consider all these things as we contemplate the prospects for 2001 - and the conclusions, as we reveal in our closing section, may be more radical than some people are expecting.

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