Internet Intercedes in the Market

The last month has been marked with worries that the stock market is about to (finally) have a correction and drop some 10% or more.  While it is impossible to tell if, or when, this might happen; a few numbers may explain some of the recent action. Stocks were seized with a bit of mania for growth and the internet which over-shadowed other parts of the market.  The Dow Jones Internet Index peaked at the beginning of March after climbing almost 70% from the start of 2013. Then it turned down and slid 16.4% to April 11th; as of this afternoon it has regained about three percentage points.  One factor in the down move may have been valuation: the PE is over 70 and has risen substantially more than the index level.

The rest of the market hasn’t shown these kinds of large shifts.  The S&P 500 is up about 30% since the beginning of 2013. While the PE is at 17, earnings have more than kept pace with stock prices and the PE is up about 21%.  Growth stocks slightly out-performed value stocks in the S&P 500 over the last two years. However, since the beginning of March when the Dow Jones Internet index peaked, growth lagged value by a four and a half percentage point spread.  The worry of the last six weeks was the passing, at least for now, of that internet infatuation.

The chart shows the S&P 500, the S&P 500 tech sector and the DJ Internet index, all rebased to 100 at the end of 2012.  The rise and subsequent decline of the DJ Internet index stands out.stocks 4-16


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