Historically, it has often been a hot run in technology stocks that has preceded market crashes and setbacks. The strong run in Wall Street over the past year has been built around the strong showing of technology stocks, and in particular anything to do with computers, whether that be software companies (Microsoft), chip-makers (Intel and Motorola) or "old-fashioned" manufacturers (IBM and Compaq). There was a significant correction in the sector last month, but the sector as a whole remains aggressively valued.
This week has seen two more telling indicators of the strength of the market's latest enthusiasm for anything which is - or even sounds like it might be - a technology stock. First was the news that General Motors is to float off EDS, the company that it bought from the maverick entrepreneur turned Presidential candidate, Ross Perot, in 1984. EDS specialises in providing information systems for large companies. The deal values EDS at $22bn, which incidentally makes it a bigger transaction than even the Disney/ABC merger, which was announced the week before, and was itself hailed as the second-biggest takeover of all time. As GM only paid $2.5bn for Perot's company, it makes it one of the few smart investments the big carmaker has made in the last decade, during which time its share of the American car market has fallen fom roughly half to barely 30 per cent.
Then, even more remarkable, is the story of the flotation of Netscape, this week's hot ticket in the New York markets. This company, founded just 16 months ago, writes software for the Internet. Barely a third of the way through its second year of trading, it has been floated on Nasdaq, the junior US stock market. Issued at $28 a share, the shares touched $75 at one point in first-day dealings before closing at $58. It has since fallen back further, but for a company with that short a history and nothing but losses in its books to be valued at close to $2bn is about as good a warning sign as you can have that the sector is becoming dangerously overheated. The combination of a vogue sector and a vogue story within that sector - the Internet has probably produced more column inches than almost any other story this year - has proved simply irresistible.
There is nothing to beat a concept stock in a bull market to keep the punters and stock promoters happy. You can be sure that not many of those who have jumped aboard have any idea what the company does, let alone how it can possibly hope to retain its 70 per cent market share in the months and years to come.
There are many ways in which brokers and others on Wall Street have explained why technology stocks have been strong performers this year. It is an area in which the US continues to dominate the rest of the world. It is also a field in which it has made remarkable progress in the past five years. The software industry continues to grow at a furious pace. But at a stock market level, any sensible investor can only have had doubts about valuations on Wall Street reinforced by this latest evidence of what looks like a bubble in the making.Reuse content