Wall Street Beat: Tech shares on wild ride

Markets calm down Friday but volatility could continue

U.S. stock markets edged up for the day Friday afternoon, but fears of an economic slowdown and concerns about the debt crisis in Europe caused technology stocks to seesaw wildly along with shares of companies in other sectors this week.

The heart-stopping gyrations of the Dow Jones Industrial Average index this week tell the tale: On Monday, the Dow plunged 634.76 points; on Tuesday, it jumped 429.92; on Wednesday it dropped 519.83 points; on Thursday it rose 423.37 points. The tech-heavy Nasdaq and the S&P 500 indexes rose and fell in parallel with the Dow.

In Friday afternoon trading, volatility calmed somewhat and shares across a broad range of sectors, including IT, were up for the day, aided by a government report that July retail sales rose higher than they have in four months. The Dow was up by 141.15, the Nasdaq rose by 19.49 and S&P 500 was up 8.64.

Nasdaq computer stocks, which have moved along with other sectors this week, were up 5.74 points in aggregate in midafternoon trading.

Though the consumer market for PCs has been soft this year, enterprise spending on IT has fueled profits for tech vendors. The big concern for tech is whether the market chaos and concerns about the economy -- or, at worst, a slump back into recession -- will cause businesses to curb IT spending and consumers to further cut back on purchases of computers.

Even though the markets seemed to take a breather Friday, economic news was mixed. A survey by Reuters and the University of Michigan showed that consumer sentiment over the last few weeks fell to a 30-year low.

The catalyst to the wild ride on Wall Street was credit rating agency Standard & Poor's announcement, last Friday after the markets closed, that it had downgraded its rating on U.S. debt, citing political paralysis over how to reduce the country's deficit. On Monday, S&P downgraded Fannie Mae and Freddie Mac, the two home financing giants backed by the federal government.

The government's last-minute pact on the deficit reached last week included spending cuts and an agreement to close certain tax loopholes. It allowed the nation's debt ceiling to be raised and avoided a default on obligations such as pay to federal workers and payments to bond holders.

But the brinksmanship shown by congressional leaders during the talks helped push the S&P to its downgrade and spooked investors and businesses alike.

"People may be thinking that if these guys in Washington are prepared to crash the credit rating, what else are they prepared to do," said Andrew Bartels, chief economist at Forrester. "Businesses are likely to be cautious about what they're doing."

Though businesses have shown readiness to slash staff before making cuts in IT spending, prolonged uncertainty or an economic slowdown will have an effect on IT spending growth, Bartels said.

The debt crisis in Europe, including fears that countries such as Greece, Spain and Italy might default on sovereign debt, also cast a pall on markets. Fears about France-based bank Societe Generale's exposure to debt caused European bank shares to plummet mid-week, after which France banned short-selling on the stock. Concerns that the U.S. financial sector's exposure to the debt crisis in Europe was another factor in U.S. market volatility.

Nevertheless, there were signs of confidence in tech underlying the market storms of the week.

On Tuesday, Apple become the number one company in the world in terms of market capitalization (number of shares multiplied by price per share), surpassing Exxon Mobil. By Friday afternoon Exxon regained its former leadership with a market cap of $355 billion compared to Apple's $351.5 billion. Nevertheless, Apple's temporary market position made it the first time a computer company was the most valued business in the world, signalling a vote of confidence not only in the company but in IT's ability to make sales gains even in tough economic times.

Other positive signs for IT this week included:

--For the quarter ending July 31, chip maker Nvidia announced a year-over-year, 5.7 percent increase in revenue, to $1.01 billion. Net income was $151.6 million compared to a loss of $141 million during the year-earlier period.

"Nvidia delivered in-line results and guided revenues slightly above the consensus view for the October quarter, quite a feat given macro uncertainty and general weakness for PCs," according to a research note by Canaccord Genuity.

--Cisco said Wednesday that quarterly sales rose year on year by 3.3 percent to $11.2 billion. It was seen as a positive sign for the networking giant, whose growth has slowed over the last few quarters. Though Cisco profit fell about one-third year over year, to $1.2 billion, the decline was a result of one-time charges for restructuring, a move that analysts have applauded. The results bettered analyst forecasts.

--The value of online sales in the second quarter jumped 14 percent year over year, to $37.5 billion,

according to a ComScore report Monday. It was the third consecutive quarter of double-digit sales growth, and the seventh straight quarter of growth overall.

--Though iPad sales have been strong and account for a large degree of investor confidence in Apple, there is good news for Android based tablets as well, according to a Digitimes research report. Shipments of Android-based tablets are expected to grow 134 percent next year compared to this year, totaling 54 million to 55 million units, the report said. Tablets have been a bright spot in consumer electronic sales, even as spending on PCs has slowed this year.

The European debt crisis, a slowdown in U.S. economic growth as measured by gross domestic product, and high unemployment has stirred market volatility over the last few months. But through it all, most bellwether IT companies have recorded solid sales gains over last year. Nevertheless, the roller coaster ride on the markets this week shows that investor nervousness and fears of a spending slowdown will likely persist for some time.

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Tags business issuesAppleciscoForrester Researchfinancial resultsnvidiaExxon MobilAndrew Bartels

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Marc Ferranti

IDG News Service
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