NEW YORK -- As technology stocks soar higher and higher, concern is growing among market observers that mutual fund investing has become little more than a self-fulfilling prophecy built on a shaky house of cards.
The theory goes something like this: technology stocks, especially anything related to the Internet, have benefited from a dynamic known in the business as momentum investing, a practice in which investors pile into a stock or a sector simply because it's going up.
The momentum feeds on itself through word of mouth and the ubiquitous financial media. Consequently, more and more money is targeted for that select group of stocks, pushing them yet higher.
Finally, professional fund managers -- who are trained to know better -- are forced to fall in line because their clients will undoubtedly question why the manager has ignored a sector that is outperforming by far all other areas of the market.
And since most fund managers' careers depend on performance, they feel compelled to invest in the latest hot sector so as not to miss out on the astronomical gains.
''The current 'perform or die' mania has turned investment managers into gamblers. They know that this is a bubble but they must perform or perish. You either perform or you die,'' said Robert Parks, a longtime Wall Street economist, author and finance professor at Pace University in New York.
Parks said the current level of speculation within the technology sector represents ''the biggest stock market bubble in U.S. financial history.''
Yearend statistics for 1999 provide ample evidence that momentum investing has winnowed down to a chosen few the list of stock market success stories.
Internet stocks rose an average of 176 percent last year, helping to push the technology-dominated Nasdaq composite index up an unprecedented 86 percent. Other sectors that benefited from their close ties to the Internet included electronics, which rose an average of 113 percent; computer software and services, up 84 percent; computer hardware, up 75 percent; and telecommunications, up 72 percent.
Yet in the midst of the longest bull market in history, the sectors that dominated the U.S. economy for the last 100 years all struggled in 1999. Manufacturing rose just 14 percent; automotive stocks were up 13 percent; and chemicals climbed 12 percent.
Even more troubling perhaps is the fact that more stocks lost value in 1999 than gained. In fact, 63 percent of the stocks traded on the New York Stock Exchange, where many of the oldest and most stable U.S. companies are listed, fell last year. The NYSE saw 1,006 stocks rise, while 1,695 declined. And nearly as many Nasdaq stocks fell in 1999 as gained. For the year, 2,135 Nasdaq stocks rose, while 2,073 fell.
Overall, 3,397 stocks rose in value, while 4,186 declined, according to Media General Financial Services, a Richmond, Va.-based market data company.
But science and technology mutual funds rose an average of 132 percent last year. No other sector came close. In distant second place were telecommunications funds, which rose an average of 72 percent.
''Since October, money managers in the United States and worldwide have faced a choice: either buy the skyrocketing shares in the tech and communications services sector or risk going out of business,'' wrote John Makin, an economist at the American Enterprise Institute, a Washington, D.C., think tank.
Makin noted that other market sectors have suffered at the expense of technology, as investors have sold off non-tech assets in order to raise money to plow into high-tech stocks and mutual funds.
Other market watchers describe a sort of mob mentality among professional investors.
''Fund managers are in a performance derby, so whatever's working they all pile into it,'' said Jim Melcher, president of Balestra Capital Management in New York.
Money managers feel compelled to jump on the bandwagon of a given stock or sector because their jobs depend on short-term performance evaluations, Melcher explained. And since most investors have grown accustomed to huge annual gains, fund managers have no choice but to chase whatever stocks are shooting higher.
''People are going to get what they deserve. They're going for maximum performance without concern to risk,'' he said.
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