Stock Market Dives 78.22; Oil Shoots Up
Mounting Mideast tensions and anxieties about an unfinished federal budget agreement Tuesday sent world markets into gyrations that drove oil prices to another all-time high, upended stocks and further weakened a languishing dollar.
Iraqi President Saddam Hussein’s threat to attack Israel and avenge the slaying of Palestinians lifted the price of the benchmark crude oil futures $1.45 a barrel to a record $40.40 in New York trading. As investors contemplated the rise and worried about whether Congress will complete a preliminary budget, they began a stock sell-off that dropped the Dow Jones industrial average 78.22 points, or 3%, to 2,445.54.
It was the second biggest drop of the year, and the largest since Aug. 6, four days after Iraq invaded Kuwait. Also contributing to the market’s dark mood were worse-than-expected corporate earnings reports that provided the latest evidence of an impending reces sion.
“There’s any number of things overhanging the markets at the moment--and they’re all bad,” said Jeff Landle, a stock portfolio manager with the Twenty First Securities investment firm in Manhattan.
The slaying of Arabs in Jerusalem’s Old City and Hussein’s subsequent threats raised the possibility that the alliance of Arab states against Iraq would crumble. “We could be watching a deterioration of the whole balance over there,” Landle said.
Many investors said they were also uneasy with the tentative budget agreement between President Bush and Congress, which leaves it to congressional committees to flesh out details of the $500-billion, five-year deficit-cutting program.
In recent days, many investors had been optimistic about the outcome of budget negotiations, convinced that the threat of the mandatory cuts ordered under the Gramm-Rudman deficit-reduction law would yield an agreement with substantial spending cuts and tax increases. But now many voiced fears that Congress would cobble together a plan that relied on accounting gimmicks to avoid the kind of reductions contained in the pact that was voted down by the House early last Friday.
Federal Reserve Chairman Alan Greenspan indicated last week that the Fed would allow interest rates to fall if that pact were adopted. Many investors believe that Greenspan’s remarks implied that rates won’t fall if a substitute pact isn’t equally tough.
“I’m afraid they’re turning it all over to the smoke-and-mirrors gang again,” said one New York investor who asked to remain unidentified. He added that even if an agreement is eventually worked out, the temporary result is uncertainty--which is what the financial markets hate most.
Trude Latimer, market strategist with the investment firm of Josephthal & Co. in New York, said the possibility of a rate-cutting budget pact “has offered the one little shred of hope that’s kept us going. Now, with this nebulous agreement, maybe that’s gone.”
The market’s decline dropped the Dow to its lowest point since Sept. 27, when it stood at 2,427.48. The index has fallen 19% since reaching its all-time high of 2,999.75 last July 16 and 17.
Jim Creber, partner in the Miller, Tabak, Hirsch & Co. investment firm in New York, said U.S. markets had opened after sell-offs in earlier trading overseas. In London, the Financial Times 100-share index had given up all the gains of the previous two days, and stock prices were also off sharply in Germany and Japan, he noted.
U.S. trading also got off to a bad start because of news that quarterly earnings of Motorola Inc., the Illinois electronics maker, would be substantially below Wall Street’s predictions, Creber said. The stock is heavily owned by big institutional investors, and the news suggested that other upcoming earnings reports may also be dismal, investors said.
Creber said Tuesday’s stock sales came mostly from institutional investors rather than individual stockholders. Redemptions of stock mutual funds recently have not been high, analysts have noted, and some funds have even reported a net increase in shares recently as prices have dipped.
“What we saw here was an institutional sell-off,” Creber said.
Some analysts said another contributor to the price slide was the rejection by UAL Corp., parent of United Airlines, of the latest buyout offer from its employees.
Volume on the New York Stock Exchange was 145.61 million shares, compared to 99.47 million shares Monday. The broader market indexes also posted big declines: The Standard & Poor’s 500-stock index fell 8.38 to 305.10, and the New York Stock Exchange index declined 4.24 to 167.41.
Computer-directed “program trading” helped drive prices down early in Tuesday’s session, but during the final frantic moments of trading such activity wasn’t a factor, analysts said. A Big Board rule limiting program trading kicked in at 3 p.m. EDT, after the Dow had fallen 50 points.
Sharply rising oil prices and the unresolved budget problems also knocked the U.S. Treasury bond market to its worst loss since early August. High oil prices and a high budget deficit can imply higher inflation, which erodes the value of bonds.
The benchmark 30-year Treasury bond lost about 1 3/4 point, or $17.50 for $1,000 of face value, to close at 97 25/32. It was the biggest drop since a 2 1/2-point drop Aug. 6. The bond’s yield rose to 8.96% from Friday’s closing yield of 8.79%.
In Asian trading Tuesday, the dollar hit another all-time low against the German mark, and a 19-month low against the Japanese yen. In later U.S. trading, however, the currency gained some ground.
The dollar closed at 1.5235 marks, compared to a low in Asia of 1.5190 marks and Monday’s New York closing price of 1.5315. Against the yen, the dollar finished at 130.35 in New York, versus a low of 128.85 yen in Asia, and Monday’s 130.40.
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