LONDON, 1 March 2004 - The consumer confidence index in US plunged in February to 87.3 from a revised 96.4 in January. This is the lowest level since October last year and well below the level of 92.9 expected by economists. Looking forward, the index is expected to sink further. This turnaround was caused by a change in investors' sentiment toward the stock market's dismal performance as a result of the growing weakness that resurfaced in telecom, networking and Internet stocks.
In 2004 thus far, stocks have come off fast both at the start of the year and now, suggesting that investors are paying the price for enjoying last year's gains. This is happening at a time when economic news is somehow encouraging. Investors today are capturing their gains and staying on the sidelines waiting for more concrete and significant economic developments. These developments could be used as catalyst to a trend reversal. But is this really happening? This pullback was indeed expected and, at a closer look, a great number of investors and managers divested funds from small, mid cap and some large cap technology stocks into mid cap energy, pharmaceutical and industrial company stocks.
The broader stock exchanges will definitely be affected and I won't be surprised to see the NASDAQ dropping by a further 5 percent. The NASDAQ Composite, which gets 41 percent of its value from technology companies, was clearly under pressure from the weakness in chip stocks, e.g. Intel, where the earnings estimate forecast was below expectations thus affecting its price targets.
Generally speaking, investors opted to move out of last year's best performing stocks mainly technology companies (+ 47 percent gain last year) that are no longer considered cheap bargains.
The question then: What do investors look for in such an environment? Not to be emotionally attached to ones stocks and, trying to find some solid grounds within this current performance, investors should look for value. Simply, value stocks with resilient strength for growth; sound fundamentals; and avoid speculative stocks with high risk perception, i.e. bargain-hunting.
Those investors who made respectable profits last year need to be careful now of the possibility of wiping-out all their gains! This market is not a bear market for sure, but be aware about a correction of some magnitude to happen. Timing will then become the guessing game. Until a correction occurs, what should we really expect?
The under-invested group and new investors will continue to buy. The profit-takers who have been in the market for a longer while, will run away with their gains before any correction takes place. Finally, the day to day traders, the swinging group of investors, who grasp upside opportunities and wait for some catalyst on the economic or political front.