With technology stocks mostly protected
from saber-rattling about the need for more interest rate hikes,
Wall Street speculates the magic shield around these issues
could lose some of its power this week.
Why? Analysts say part two of Federal Reserve Chairman Alan
Greenspan's testimony before Congress in mid-week may be the
catalyst, forcing investors to rethink galactic tech valuations
at a time when borrowing costs are expected to rise.
Technology may still deliver fat gains as interest rates
move up, Wall Streeters say. But they also warn that there will
come a time when increasing lending costs will force Corporate
America to cut back on capital spending, hurting highfliers like
computer and software makers.
"As investors digest the Greenspan news, the question is at
what point do they believe technology stocks will be affected by
higher interest rates," said George Rodriguez, senior vice
president at Guzman & Co. in Jersey City, N.J. "It is bound to
In fact, the Nasdaq composite index (.IXIC), which features
some of the biggest names in tech including software behemoth
Microsoft Corp. (MSFT.O), last week finally showed signs of
caving in to interest rate pressures.
On Friday, the technology-rich index slid 137 points, or
more than 3 percent as Wall Street fretted over hawkish comments
Greenspan in congressional testimony had made the previous day.
But the Nasdaq still ended up about 0.37 percent for the week at
This week's second part of the Humphrey-Hawkins testimony to
the Senate is not expected to differ from Greenspan's comments
last week before the Banking Committee of the House of
Representatives. But there is always the chance he may trigger
more alarm in a question and answer session that follows.
On last Thursday, Greenspan signaled that more rate hikes
may be necessary to prevent the economy from speeding out of
control, sending the Dow Jones industrial average (.DJI) down
1.97 percent, or 205 points, for the week to 10,219.
The slide shoved the 30-stock index back into correction
mode as fell more than 10 percent 11.10 percent to be exact
from its Jan. 14 closing high of 11,722.98.
"There is certainly a good part of the market that has
sensitivity to interest rates," said Rick Meckler, senior
managing director at Liberty View in Jersey City, N.J. "But if
interest rates keep going up, there will be less capital
spending which means that starting with PC makers to all they
way down the line will see some slowdown in spending."
This week, a shortened four-day trading period because of
Monday's President's Day holiday, will also be the week of
reckoning for the nation's top retailers with many expected to
One of the first out of the gate will be home improvement
retailer Home Depot Inc. (HD.N) on Tuesday followed later in the
week by Gap Inc. (GPS.N) and J.C. Penney Co. Inc. (JCP.N).
Retailing stocks have been beaten up in recent weeks as the Fed
has warned that consumer spending must ease up to keep the
economy from blowing a gasket.
Unless the retailers' earnings disappoint, analysts suspect
the sector may start to bounce back along with financial
services companies, which have also been punished for being
sensitive to interest rates.
"I would say that I would expect that the financial
services and retailing sectors are about to find support
levels," Rodriguez said. "I expect them to bounce back and I
expect that technology stocks will find inflation pressures may
start to catch up with them."
This week is rather light on economic data, but Wall Street
will scrutinize January durable good orders and fourth quarter
gross domestic product figures for clues about the economy's
January durable goods orders are due on Thursday morning,
with economists surveyed by Reuters looking for a 0.9-percent
drop in monthly orders for big-ticket items like washing
machines and airplanes.
On Friday, the government will report the final numbers for
fourth quarter Gross Domestic product.
"GDP is always interesting, but its ancient history by the
time you get it," plus this is the final look at the number,
said Jose Rasco, senior economist at Hoenig.
"This should be a pretty slow week in terms of data. What's
more interesting is the next week, when we get more important
data like the February employment release."
Weighing on the market is expectation the Fed will enact at
least a quarter of a percentage point interest rate hike when
its rate-setting committee meets next on March 21.
The Fed has pushed rates up one full percentage point since
June of last year but the moves have done little to slow demand
and economic activity.
"People who have borrowed heavily to buy stock for the long
term are going to discover that it is not written in the Bible
that the stock market is going to go up each year," Charles
Biderman, chief executive of TrimTabs.com, a company which
tracks data on mutual fund flows and other indicators.