Why the Nasdaq Outperformed the Blue Chips

The tech-heavy index trounced the Dow and S&P 500 in the first half of 2009. But have tech stocks outpaced the economy, too?

By Ben Steverman

Despite a nasty recession, investors in the technology sector had plenty to celebrate in the first half of 2009. But some question whether tech stocks can continue posting gains for the rest of the year.

In the first half of 2009, technology shares did more than just outperform. Tech stocks were stock market stars, beating every other sector by a wide margin. Now as the market enters the second half of the year, tech investors say they wonder how long their luck can hold out.

Of 10 sectors in the broad Standard & Poor's index of 500 stocks, seven have shown negative returns so far in 2009, according to data provider Capital IQ. Of the three sectors that actually moved higher, consumer discretionary stocks rose 9% and the small materials sector gained 14%. By contrast, information technology stocks jumped 25%.

Because so many tech stocks are in the Nasdaq composite index, it trounced other major indexes. For the first six months of the year, the Dow Jones industrial average was down 3.8%, the S&P 500 was up 1.8%, and the Nasdaq gained 16%.

That's quite a contrast to the last recession, when the bursting of the tech bubble decimated many portfolios. From 2000 to 2002, the Nasdaq lost more than 60% of its value.

Portfolio managers cite several reasons why tech was so attractive in 2009 despite the severe recession.

Techs slashed inventories and output

Technology firms weren't unaffected by the downturn, especially in late 2008, when companies canceled software purchases and hardware orders dried up. "Tech got hammered in the second half of last year," says Richard Parower, portfolio manager of RiverSource Investments.

But tech executives had learned lessons from the severe downturn earlier this decade. "They were pretty aggressive in cutting inventories and production," says Dan Genter, chief executive and chief investment officer at RNC Genter.

The combination of a steep decline in business and ruthless cost-cutting in 2008 set tech firms up for a quicker rebound in 2009, he says.

With so much bad news already factored into their stock prices, tech shares started attracting bargain-hunting value investors. "These stocks were considered too cheap," says David Stepherson, portfolio manager at Hardesty Capital Management.

In the first six months of 2009, investors underwent an abrupt mood swing, with the broader market dropping steeply until March and then bouncing back on rising optimism. But tech stocks rallied throughout the first half of the year, in both of these very different market environments.

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