Worried Dow Drops 56.44 Points
Worries about corporate earnings and the economy sent the stock market reeling Monday to its biggest loss in six months, driving the Dow Jones industrial average down 107 points before it recovered to close the day off 56.44.
In a session whipped by rounds of computer-directed “program trading,” investors fretted over the disappointing quarterly profits of such blue-chip companies as McDonald’s and the clouded outlook for interest rates and inflation. The plunge, which left the Dow at 2,904.70, was the biggest fall since Jan. 22, when the closely watched index fell 77.45 points.
The market advanced dramatically for most of the spring and early summer, and only last week the Dow was twice within a quarter-point of closing at the historic 3,000 mark. But traders have grown increasingly uneasy in recent days as they have watched reports of bad earnings flow in, first from leading high-technology firms, then from faster-growing, supposedly recession-resistant companies like McDonald’s.
“People bought all those blue chips, then saw them go through the floor when the earnings came out,” said Jim Creber, partner in at the investment firm of Miller, Tabak, Hirsch & Co. in New York. “They got bagged, and they got scared.”
Added Eugene J. Peroni, director of technical research at the Janney Montgomery Scott brokerage in Philadelphia: “I think we’re in the midst of a substantial and abrupt shift in psychology.”
The Dow reached its low for the day about 80 minutes into the session and then labored to reclaim lost ground. But in the afternoon, new rounds of program trading battered the index again, and it was off 91 points at 2 p.m. EDT.
Program trading’s role in the gyrations brought predictions that there will be a new outcry over the practice and new pressures to curb it. “My guess is that this will bring the whole thing back as an issue,” said Michael Metz, market analyst with Oppenheimer & Co., a New York investment firm.
The Dow’s fall quickly tripped the controversial “circuit breaker” system that has been set up to stabilize volatile markets with time-outs and other special steps.
The system went into effect in Chicago Mercantile Exchange trading once there was a 12-point drop in the futures contract that is derived from the Standard & Poor’s 500-stock index. Thereafter, traders were barred from selling the futures contract.
In addition, once the Dow had fallen 50 points, member firms of the New York Stock Exchange were bound by a Big Board request to refrain from “index arbitrage” selling of the stocks that make up the S&P; 500 index. The request applies only to the selling of shares while the market is declining.
Index arbitrage is a kind of program trading that seeks to profit from tiny, momentary price discrepancies between stock index futures and the stocks that compose them.
Several traders said they could not tell whether member firms were heeding the request, and a Big Board spokeswoman said the exchange had no information on the extent of compliance.
The Dow’s 56.44-point decline represented a loss of 1.9% of its value. Among the broader indexes, the S&P; 500 fell 6.30 to 355.31, or 1.7%; the New York Stock Exchange composite index was off 3.43 to 194.22, a 1.7% decline.
Another source of anxiety was a rise in overnight interest rates in Japan, where rumors of further interest rate increases have rattled investors for several days. Japan’s Nikkei index fell 634 points, or 1.9%, on Friday, and 526.73 points, or 1.6%, on Monday.
An increase in interest rates makes it harder for companies to raise money, and often triggers sharp declines in stock prices. And a rise in Japanese rates would make it less likely that rates would decline in the United States.
Another factor in Monday’s decline was new anxiety about the country’s general indebtedness. The concern was prompted by a published report that the largest guarantor of student loans, the Higher Education Assistance Foundation, might go bankrupt.
The earnings disappointment from McDonald’s jarred the market greatly. The fast-food company reported a 10% increase in profits, compared to last year’s second quarter, but that did not meet Wall Street’s expectations, and the stock slid $3, to $33.
Some analysts have argued that the blue-chip stocks have been far overpriced by the recent stock run-up, and some contended Monday that the plunge was only an overdue correction. Last Friday, when many investors expected the Dow to bound convincingly past 3,000, it fell 32.67 points.
“The market has been overbought for days, and today the Dow took a respite,” said Brad Weeks, senior vice president for equity trading at Donaldson, Lufkin & Jenrette Securities in New York. “It was maybe a little dramatic because it all happened in 45 minutes. . . . But I don’t think this has changed the fundamental outlook of the institutional investor.”
Others, however, were less optimistic, pointing to newly aroused fears about the Federal Reserve Board’s intentions regarding interest rates. Two weeks ago, many stock investors read Fed Chairman Alan Greenspan’s congressional testimony to mean that the central bank intended a substantial easing of interest rates.
While the Fed lowered rates slightly, “many investors believe this big easing didn’t pan out, and the Fed’s lost credibility with them,” said Creber of Miller Tabak.
Declining stocks outnumbered advancers by 1,430 to 227 on the New York Stock Exchange. Volume was an above-average--but not extraordinarily heavy--209.03 million shares. During last Friday’s session, 177.81 million shares changed hands.
The only stock in the 30 components of the Dow Jones index that rose for the day was Union Carbide, which gained 62.5 cents a share to $19.625. Navistar was unchanged at $3.875.
McDonald’s was most active stock on the NYSE, with 4.2 million shares traded. Other volume leaders, in declining order, were: Wal-Mart, off $1 to $32.50; General Electric, down $1.50 to $72.50; Philip Morris, down $1.125 to $49; Boeing, down $2.125 to $55.875, and Baxter International, off $.675 to $26.
