Is the Party Over?

By Daniel Kadlec

Who says the Y2K bug was a hoax? When Wall Street fired up its computers on the first day of trading this year, the things clearly weren't working right. Sell orders? No way! But sellers, mia most of last year, had indeed arrived--in big numbers and with all the highflyers as their targets. Millennial darlings began to break down like virus-ridden websites, from the supercharged (Qualcomm, Oracle) to the superhyped (Amazon, Yahoo!) to the just plain super (Sun, Lucent, AOL).

The tech-rich NASDAQ, which emerged last year as the stock market's most important index, shed nearly 10% of its value in less than three days. Not quite carnage, but a deafening alarm that should prompt soul searching among hordes of Monday-morning tech investors. Many know little about the stocks they own--other than that they own way too many, and every last one of them is grossly overvalued by traditional measures.

The massacre spanned all the big-market averages, including the venerable Dow, which late last year added tech bellwethers Microsoft and Intel to its roster. But the grande dame of averages quickly recovered. Faced with a hot economy and bubble-like prices on the NASDAQ, investors rekindled a fondness for the Dow's cyclical blue chips, including Alcoa, 3M and Exxon Mobil; one of its recently battered, Disney; and defensive consumer stocks like Procter & Gamble. By week's end, the Dow was back at a record high. The rebound carried over to the NASDAQ, which pared half its losses.

But plenty of questions remain. The sudden rotation into cyclical and beaten-down stocks, perceived to carry less risk, recalls a similar flight to safety when tech stocks last hit a rough patch last spring. Then the change in leadership lasted barely a month before stalling and taking the bull market hostage all summer. So the thing on everyone's mind now: Whither those critical tech stocks? For better or worse, it seems, as they go, we go.

My take is that the selling is about done. What we saw last week was tax-deferred profit taking. Much of last year's gains came in December. Selling winners then would have triggered potentially huge capital-gains-tax liabilities payable this April. By waiting until January to sell, investors put off the tax until April 2001.

But that's not to say we have clear sailing. Interest rates are way up and headed higher--almost always a recipe for trouble in the stock market. Another trouble spot is the changing nature of competition on the Internet. Websites at traditional retailers like Barnes & Noble and the Gap were among the most visited in December. Dotcoms no longer rule the Net. Despite bungling its online Christmas business, Toys R Us's well-established brand will lure shoppers to its website anyway.

This branding issue is a huge concern for start-up dotcoms. They had assumed they could buy brand awareness with big ad dollars. They can't. There are too many of them, and it's very confusing. After an evening's bombardment of slick, edgy TV ads, I still can't quite recall which dotcom shot the gerbil out of the cannon, or what it is they do. The upshot: this could be the year of the Internet shakeout, when dozens of also-rans, unable to buy our attention, flounder. Bye-bye, Net bubble. Last week wasn't the start of that. But it makes you wonder when the time will come.

For more on the stock market, see time.com/personal E-mail Dan at kadlec@time.com He also appears regularly on cnnfn