Lately, it seems to be the norm to have a mixed market. The Dow Jones Industrial Average has been closing on the down side, while the NASDAQ steadily rises.
The Dow is an index of 30 "blue chip" stocks. "Blue chip" stocks belong to widely known companies with a large volume of shares such as Home Depot or Microsoft.
The NASDAQ is a larger index of stocks comprised of companies with less shares outstanding, involved in sectors such as the Internet and biotechnology. The NASDAQ includes stocks such as Cisco, a networking company, and Amazon, an online retailer.
"The biggest problem with the Dow is that there is little representation in some of the industries that are most important to us today: Internet, computer hardware, wireless communications, biotechnology, etc.," Andy Schoonover, president of the McIntire Investment Institute and third-year Commerce student said.
"A fundamental transformation in the economy is going on," Patrick Dennis, McIntire professor of Finance said.
Despite Federal Reserve Chairman Alan Greenspan's warning that interest rate hikes will continue, the NASDAQ hit yet another record high Thursday, closing at 4548.92. The Dow was off 46.84 points that day. In the past, investors were wary of the NASDAQ's volatility, but now they are rushing to buy its components.
"I believe that the stocks in the NASDAQ are overvalued. People keep buying stocks in the NASDAQ knowing they are overvalued, but also knowing that other people will buy the stocks in the future. People are in love with" the NASDAQ, Dennis said.
The market has continued to see increases in the NASDAQ for a couple of weeks.
Since the beginning of the year, the NASDAQ already has had eight of its 10 biggest point gains in history.
"The rate of growth is high for stocks in the NASDAQ," Dennis said.
"People are in love with dot-coms and biotechs. These sectors tend to have higher rates of growth, given that prices are not justified," he said.
Prospective growth seems to be the main factor in deciding which stocks to pick.
"Today's investors look for growth above all else. If the company doesn't have huge prospects for growth, they will under-perform," Schoonover said.
Investing today seems to be driven forward by younger generations.
"Investors in the NASDAQ tend to be younger, riskier, and more aggressive while investors in the Dow are more risk-averse and demographically, a little older," Dennis said.
There was a time when the Dow was known as the foremost indicator of the stock market, but this is changing.
"The Dow is no longer the gauge for market performance. The index generally consists of firms that are in mature industries and have meager growth prospects," Schoonover said.
Recently, the Dow changed some of its components to better represent the economy.
"The Dow has made great strides by adding the likes of Microsoft and Intel but they have a long way to go before the index becomes representative of today's economy," Schoonover said.
While some analysts think the NASDAQ represents the total market performance, it still has shortcomings.
I don't think the NASDAQ is a good indicator of the market because it is biased against biotech companies, Dennis said.
Investors need to look at many indicators to get a good idea of how the market is doing.
"Look at all stocks, and don't forget international stocks. I look at the market as being partly the NASDAQ, partly the Dow, partly Asia, partly Europe, etc.," Dennis said.
"You have to take a global perspective of the market," he said.
Wall Street analysts say that, based on past performance, if the Dow is down in the first month of the year, it is likely to be down for the whole year.
"To predict what's going to happen in the future, you have to look forward, not back to the past," Dennis said.
"Wireless communications is the next big thing. I also believe in biotech. Once we map the human genome, there will be tremendous growth in that sector," he said.
"I hesitate to speculate on the future market performance but I see the NASDAQ and the S&P 500 continuing their fantastic returns through 2000," said Schoonover.
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