They're shark-infested investment waters out there. Nasdaq, the US tech sector index, continues to plunge and most indices worldwide are now well down for the year. The US March inflation figures started the rot, even though April's appeared more benign. Real GDP and employment cost data for the first quarter of 2000 show a red-hot economy with rising labour costs. It would have been difficult to invent a more bearish set of macro numbers. So it was no surprise that last month the US Federal Reserve hiked the interest rate by 50 basis points and indicated that it was ready to raise it again unless there were signs of a slowdown. There won't be, so expect another 50bp before the summer is over.
For the tech sector, in particular, the squeeze on corporate margins as interest rates rise will mean downgraded long-term profit expectations. At the very least, companies with the highest cash-burn rates will find it more difficult to source cheap capital. That's why Nasdaq continues to dive, down over 30% from its peak.
If Fed chairman Alan Greenspan has made anything clear this year, it's that he wants to slow the runaway US economy "before it's too late".