Has the market rally in biotech and Internet stocks hit a wall?

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    Wall Street extended its decline today following a major sell-off Thursday that included the single worst day for the Nasdaq since 2011.

    The technology-heavy index has dropped more than 8 percent from the high it reached after the dot-com bust of 2000. Today, the Nasdaq fell another 54 points to close below 4,000 for only the second time this year. The Dow Jones industrial average lost 143 points to close at 16,026. And the S&P was down 17 at 1,855 — at 1,815, its lowest level in two months.

    There are questions now about whether the long market rally may have hit a wall.

    Hari Sreenivasan picks up on that and the specific concerns in tech and biotech.


    I am joined now by Hugh Johnson. He's a market analyst and runs his own investment management firm.

    So, Hugh, first off, what's happening with these tech stocks and, maybe more specifically, the biotech ones?

  • HUGH JOHNSON, Hugh Johnson Advisors:

    Well, if you take a look at market history, you know, what we have had more recently, as Judy suggested, is right on.

    And that is, we have gone a long period — you remember 2013, the market up 30 percent. Nobody expected that. That's a long time for the market to be going up without some sort of an adjustment or a correction. So I think this all starts with the basic sort of commonsense perception that this has got to be at least a correction in an ongoing bull market.

    Now, it's a little bit more than that because, you know, if you have stocks going up a straight line, basically, as they did in 2013, they're going to reach levels that are arguably very overvalued. And I think this starts really as a valuation issue. Really, the prices of stocks got to levels that didn't reflect underlying fundamentals, reflected unrealistic growth rates, and, as a result, they started to sell.

    And when they start to go down, when some stocks start to go down, it tends to be sort of contagious. It spreads. It makes everybody worried that we're going to have a repeat of 2000 or maybe 2008, which is fresh in the minds of just about every investor. So it really starts with valuation. Valuation is really, I think, the number one issue.


    So were the tech stocks or biotechs more volatile in these valuations?


    Yes, they're really more volatile because of the expectation, particularly when you look at the Internet stocks, then sort of new technology, social media stocks. You can also look at the biotech stocks. They have reached levels that reflected growth rates which are much higher than the sort of widespread or broader market, reached levels that, quite frankly, in my judgment, reflected very unrealistic prospects for their fundamentals.

    At the same time that that happened, those companies themselves told us that the kind of prospects that Wall Street was expecting is not in the cards, and that kind of touched it off. It really was those stocks in particular that have reached levels. It wasn't quite so widespread. And, as a result of that, you see the decline being primarily technology, primarily biotechnology, and a few other sectors.

    It spread a little, but not a lot. Some sectors of the market, the safer sectors, where there's not an earnings problem, utilities, telecommunications, consumer staples, things like food stocks and household product stocks, they didn't get the — they didn't have anywhere near the kind of decline. It's primarily the so-called high-flyers.


    OK, so this is a correction, or is it the beginning of a bear?


    That's a great question.

    It's probably only a correction. For you to make the case that this is the start of a bear market, I think you have to make the case that it's going to be a decline in stocks that's going to be accompanied by a recession. I think it's very hard to make a case that we have a recession in the cards in 2014-2015.

    The consensus forecast for the economy, something like 2.6, 2.7, good growth in 2014, even stronger growth in 2015, when we take a look at some of those things that kind of tell us where things are going, index of leading economic indicators, those indicators tell us — they continue to go up, continue to tell us that the economy is going to expand through 2014 and '15.

    So I think, based on all those kind of let's call them tea leaves, you really have to come to the conclusion — we don't know for sure, but a conclusion — that this is probably a correction, and a fairly severe one, one that's going to really test us, in an ongoing bull market, not the start of a bear market that will be accompanied by a recession.


    All right, Hugh Johnson, thanks so much.


    My pleasure.

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