Analysts Realize There is A Downturn!

The Business Intelligence (BI) Index was down 3.96% today, -33.0% year-to-date (YTD) and stocks within the index are down an average of 43.9% from their 52 week highs. This compares the iShares S&P GSTI Software Index Fund(IGV)  -32.1%, YTD and off 35.0% from its 52 week high. The BI Index had been slightly beating the IGV index earlier in the year but the latest downdraft in the market has pulled the BI index below the IGV.

The YTD performance of the major indices (as of today’s 10/7 US markets close): Dow -28.8%, S&P 500 -32.2% and Nasdaq Composite -33.8%. The BI Index and IGV are both in the range of these indices.

With the deteriorating expectations on corporate spending, many financial and industry analysts recently are lowering IT spending estimates for the remainder of this year and through next year. You might not have heard there is an economic crisis or slowdown but the analysts have keenly picked up on this phenomenon and are revising estimates.

Consensus has not been reached on the macro impact on IT budgets or on the specific impacts on hardware, software, services and IT employment. In the first half of the year the impact on IT budgets was largely confined to financial services but economic concerns have expanded to both consumer and corporate spending thus touching many industries.
For most of the year there was the perception that tech companies selling overseas would be able to avoid a US-only recession. As global recession concerns rise that perceived cushion has disappeared and with it tech stocks have been hit hard recently by the Bear.

Accompanying reductions in overall IT spending estimates and decreased expectations for specific companies, financial analysts have been downgrading stocks and lowering their price targets. This is certainly appropriate and expected considering the degrading economic conditions.

These downgrades and future upgrades (when the Bull reemerges), though, seem to lag (often significantly) industry and stock movements. A downgrade would have been much more useful to investors before, or at least early in the cycle, an industry group has decreased 30% in value and individual stocks lose more than 50%. Likewise, do not be surprised if the eventual upgrades occur after the industry and individual stocks have already made significant moves higher.

I am not suggesting any way to improve the readings financial analysts get from their crystal ball. They provide a great service and insight into the industry. What I am suggesting is that you do not rely on solely on buy or sell ratings since they historically lag market and stock performance. It is comforting to have that Strong Buy rating when you buy that overpriced stock but it not likely to change to a Sell rating until well after most of your investment is lost. Do your homework.

fyi: The index is calculated on an equal-weight representation based on closing prices as of 12/31/07.