The January effect was a beautiful thing for the tech sector. The Nasdaq composite index surged more than 12 percent. Investors even found a bright side to gloomy earnings reports.
The January effect is a Wall Street phenomenon in which retirement money floods the market and investors go on a buying spree. Aided by bargain hunters and two interest rate cuts by the Federal Reserve, technology stocks rallied. Adding to the momentum were tech company officials saying they expected a second-half rebound. Investors ate it up.
However, not everyone is so upbeat. Bill Schaff, fund manager at the Berger Information Technology Fund, says there may be a February effect. “Investors will soon focus on economic data,” he says. “Therell be a February sell-off. Well lose some, if not all, of Januarys gains.
Schaff says that as investors focus on economic data, theyll start to wonder why the Federal Reserve is cutting interest rates so aggressively. Most analysts agree the economy is slowing, but what happens if business doesnt stabilize in March or April? After all, it takes at least nine months for an interest rate cut to boost the economy.
Chuck Hill, director of research at earnings tracking firm First Call, says investors could start worrying about the third quarter. He noted that analysts have already slashed tech companies earnings targets for the third quarter from growth of 11 percent to 2 percent.
Schaff says hes on the defensive. Hes holding IBM, which showed in its most recent earnings report that it can handle a slowdown, as well as BMC Software and Computer Associates, companies that will ride shotgun with IBMs mainframe product cycle. Schaff is also still a fan of BEA Systems, i2 Technologies and Siebel Systems. “Customers will buy that stuff because it generates a return in good times or bad,” he says.