While the generality of share prices in both London and New York have recovered a substantial part of the ground lost on Meltdown Monday, computer stocks, led by DEC and IBM, have tried several times to participate in rallies, only to fall back exhausted to levels little above those of last October. In London, for other reasons, most recently changes in Capital Gains Tax rules in last week’s budget, GEC, Plessey, Racal and Thorn EMI are all looking decidedly wan. Is the computer and electronics sector perversely out of step with the rest of the market, or is it giving out a message that most investors simply do not want to hear? The reason that IBM and DEC look so depressed is that there is low key but persistent evidence that the US computer market has slowed down quite markedly in the first quarter. Firm evidence for this will not become plain until companies start publishing their first quarter results next month. IBM’s will be horrible, not least because it hauled so many top-end sales forward to bolster its 1987 fourth quarter, also because the mid-range market is hanging fire ahead of the Silverlake launch, and because the 9370 is not going to overcome its credibility gap without energetic attention that it has not yet received. Those internal factors alone will be enough to give IBM a pretty rotten quarter, but dollar translations are not going to be so beneficial this time as the year-on-year gains from the dollar’s slide start to drop out of the figures, and the vital West German market is looking decidedly lacklustre. Bad IBM figures will be enough to send a shiver through the entire sector even without signs of faltering from the likes of NCR. But all the indications are that several key computer companies will also be coming out with fadeaway figures for the first quarter. Those companies – like DEC – that have already warned of a slowdown in the first quarter have said rather disingenuously that in the wake of Meltdown Monday, companies are pausing to see what happens before committing to major new investments. It doesn’t take many big companies doing that to plunge the US into a fullscale recession that feeds on itself. Unprecedented The fact that it would be unprecedented for a bear market to play itself out in so short a time as the six months since October 19 doesn’t mean to say that it can’t happen: Britain might achieve zero inflation and a balance of payments surplus on the back of an export-led boom for 1988-1989, it’s just that both possibilities are equally unlikely. Much more likely is that share prices are right now very near the peak of a strong rally in a bear market, and that over the next six months they will forge downwards to test the lows made last autumn, and at some stage later this year, likely plunging through them in the US, and perhaps here in the UK as well. The renewal of takeover activity, the tentative revival of the new issues market look more like warnings than signs of hope. Meltdown Monday gave investors graphic reminders of the truth of many of the old market saws – that when prices fall, the good go down with the bad; that initially, the more marketable a share is the bigger the downside risk in a bear market plunge, so that the high capitalisation blue chips for which there is always a market, at a price, get battered particularly severely.
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