To buckle up, or bail, as tech stocks slide?

It's been a nail-biting time on Wall Street - with market averages hitting the skids in recent weeks. The Nasdaq exchange, a key barometer of the high-technology sector, has been particularly hard hit.

"For most investors, it is probably time to hunker down and stay the course," says Arnold Kaufman, editor of The Outlook, a financial review published by Standard & Poor's Corp.

That is not to say that some investors have not dumped sagging technology stocks in favor of bonds or cash investments, such as bank CDs and money-market funds.

"The B word [for bonds] is back," laughs Sam Paddison, senior vice president of First Capital Group, a Philadelphia-based investment firm.

"Younger investors, many of them under 30, have no bonds in their portfolios at all. Everything has been stocks," he says. "Now they are discovering fixed investment products for the first time."

Mr. Paddison recommends that stock investors diversify, buying high-quality corporate bonds of intermediate term, which is about 10 years duration.

Mutual-fund expert Sheldon Jacobs, who publishes the No-Load Fund Investor newsletter, is encouraging his clients to have a significant weighting in bonds and cash. "Rein in" your enthusiasm for equities, he argues, noting that most markets are now "priced to perfection" - that is, markets will not be able to add much oomph to equities for the time being.

Still, random checks with major investment houses and financial tracking firms indicate stocks remain the financial vehicles of choice for most Americans, especially workers with 401(k) or 403(b) tax-deferred retirement plans.

Yet investment pros will be intently watching to see how these small investors react to last week's dramatic drops in the market. Poor corporate earnings reports, the euro's decline to record lows against the dollar, increasing energy costs, and reports of rising inflation, all pushed major market indexes downward.

By the middle of last week, the Nasdaq Composite Index was down more than one-third since its record high in March. And the blue-chip Dow Jones Industrial Average dropped below the 10000 mark for the first time since March. Both indexes bounced back by Friday's close, and analysts say some perspective is in order.

The downward drive of the Nasdaq has been led by the index's largest companies - the so-called Nasdaq 100, says veteran fund manager Fred Kobrick, who runs three well-regarded stock funds out of Boston (Nvest Kobrick Funds), two of which have sizable positions in technology. Large well-known firms, such as Microsoft and Intel. Many of these equities have taken hits ranging from 25 to 50 percent (or more) of their peak stock prices.

Meantime, many lesser-known Nasdaq companies are holding their own, or even posting gains, Mr. Kobrick notes.

What's occurring, he argues, is a significant rotation within the technology sector, producing a return to a more normal technology market, where volatility is the tradition.

Positioned for more gains

Kobrick believes that this greater breadth is positioning the entire technology sector for gains going into next year. There is nothing on the horizon at present that calls for dramatic further market erosion, he adds.

"We've just had a mini-crash in Nasdaq," he argues, but out of it we are returning to a more steady high-technology sector.

Kobrick also believes that investors eager to escape technology for old-line "value" companies need to remember that, as the economy slows, old-line value firms will have less room to post growth. By contrast, well-chosen tech firms, he argues, remain in play for steady gains. Among tech sectors, Kobrick likes communications firms, selected software companies, and some semi-conductor firms.

Kobrick is not alone in his relatively upbeat assessment. Prudential Securities Inc., for example, just issued a research outlook arguing that the worst may now be over in the current downturn.

Beware overvalued stocks

But the analysts also recommend that investors use caution before buying into companies with high valuation levels, usually high-tech firms - and, in particular, dotcom firms.

The challenge is "that there are still a lot of shaky hands" holding stocks, especially once-highly-valued technology issues, says Mr. Kaufman of Standard & Poor's. Until such time as these nervous investors actually sell off their holdings - and produce an actual bottom in the market - Kaufman expects more volatility and downward price pressure.

Still, he reckons, the bottom is not far off. Unfortunately, the upturn, when it comes, will not be sharp, he says. Standard & Poor's now projects that the S&P 500 Index will close out the year at about 1500 points.

That would mean market gains of only about 2 percent. That's why many analysts here believe the tech sector - for all its recent woes - may yet produce "the true winners" going into next year.

(c) Copyright 2000. The Christian Science Publishing Society

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