Remember the widely predicted second-half recovery?
Didn’t think so. It’s a forgotten memory, buried beneath an avalanche of economic setbacks and world turmoil.
The Nasdaq Composite was down 30.2% for the third quarter, while the Dow Jones Industrial Average declined 16.5%. The S & P; 500 declined 15.8%. These quarterly losses were the most severe since the stock market crash in 1987.
Orange County stocks did no better, and even a little worse. Newport Beach-based Roth Capital Partners’ periodically updated OC Billion Dollar Club, an index of 20 stocks with market capitalizations of more than $1 billion, fell 27.4%. Roth’s OC 50,firms with market caps of $25 million to $1 billion,was down 31%. And Roth’s OC Tech index had an even steeper fall. That group of 20 technology companies fell 34.6%, with none of the firms posting a gain for the quarter.
In all, OC stocks lost $25 billion in market capitalization with nine stocks declining for every one that rose.
“OC stocks were severely punished in the third quarter with record-breaking losses approximating those of the Nasdaq Composite,” said Russell Murdock, investment advisor at Eclectic Associates, a Fullerton-based money management firm. “OC tends to be a ‘high-beta’ economy whose stocks will thrive more than the market in general during a growing market but suffer more than everybody else in a falling market,” he said. “This was readily apparent during the third quarter.”
“Stocks move in sync with economic trends,” said Frank Dohn, senior investment officer at Wilmington Trust, the 13th largest investment firm in the United States. “The third quarter could be characteristic of a slowing economy, rising unemployment, slower exports and, finally, declining consumer confidence,” he said.
Interestingly, while the Sept. 11 terrorist attacks on New York and Washington D.C., worsened the situation, stocks had entered a steep fall before then. The economy was already looking unusually precarious, analysts said.
“Economically sensitive companies were already coming down before the Sept. 11 attacks, which created an additional shock to the economy,” said Gregory Lai, chief investment officer at Irvine-based Affinity Investments.
Although the losses accelerated after the terrorist attacks, most of the third-quarter declines occurred before Sept. 11. The Dow, for instance had fallen by 9.33% in the two-plus months leading up to attacks. In the 19 days after that, the Dow fell another 7.89%. The Nasdaq had lost 21% of its value from July 2 to Sept. 10. It fell another 11.6% afterward.
The Billion-Dollar Club posted third-quarter declines of 17.4% and 12.1% before and after the attacks, respectively.
“The bombing had an impact, but it was an ugly quarter anyway,” said Gordon McBean, a consultant with Roth Capital.
In fact, after hitting their closing lows on Sept. 21, the Dow and the Nasdaq rose 7.4% and 4.6%, respectively, in the remainder of the month.
“The market has shown a lot of resilience,” McBean said. “The market could have been a heck of a lot worse.”
While tech led the way downward, the drop in the quarter was across the board, with stocks in almost all sectors showing modest to steep declines. Sixteen stocks out of the 20 in the Billion Dollar Club fell during the period, while 48 of the OC 50 index closed lower.
“The market is trying to say that technology is not coming back in the near future,” said Affinity’s Lai. “There is a belief that many companies will not come back any time soon.”
Some of the stocks that had sharp declines in their share price were Irvine-based Broadcom Corp., which plunged 53% in the quarter. The company lost $5.6 billion of its market value as investors were concerned about slowdown in chip sales. Aliso Viejo-based QLogic Corp. was the other big loser. Its stock declined by 70% and the company was second in terms of erosion in shareholders value. QLogic’s investors saw the company’s value fall by $4 billion in the quarter.
Another big loser in the index was Costa Mesa-based Emulex Corp., a maker of components for storage systems. Emulex’s shares were down 76%.
“Stocks with high PE fell lower,” said Lai. “There was a PE compression in the quarter.”
Companies such as Broadcom, whose stock traded at $280, its all-time high, last year fell to around $20 by the end of September. Broadcom last year was the most highly valued company in Orange County, a distinction that Irvine-based Allergan Inc. took over in the second quarter. Allergan’s market value is now $3 billion more than Broadcom’s.
But even in this distressed market there were stocks that posted some gains. Defensive stocks such as medical device maker Beckman Coulter Inc., title insurers Fidelity National Inc. and First American Corp. and Health Care Property Investors Inc., a REIT, were gainers.
“The healthcare sector was up and continued to be the bastion of flight towards quality,” said Lai.
“We like the value-oriented stocks such as energy, food and beverages,” Dohn said. “We are avoiding consumer cyclicals and transportation.”
He said that he expects the market to bounce back sometime next year. n
