Markets Take a Pounding : IN NEW YORK, TOKYO : Dow Slides; Japan Drops to ’86 Prices

Sellers swamped U.S. and Japanese stocks Wednesday in a powerful sign of investors’ increasing mistrust of many companies’ near-term outlook:

* The Dow Jones industrial average fell 41.73 points, or 1.3%, to 3,287.76, bringing its loss since June 1 to 125.45 points.

* Losing stocks topped gainers by a 7-2 ratio on the New York Stock Exchange on heavy volume of 243.34 million shares.

* In Tokyo, the Nikkei average plunged 507.73 points, or 3%, to 16,445.80, its lowest close since October, 1986. By midday today, the Nikkei was off another 258.02 points to 16,187.78.

Stock prices in both countries have been weakening in recent weeks, though from vastly different heights: U.S. blue chips have been at all-time highs, while Tokyo has been mired in a 2 1/2-year bear market.

But analysts say the underlying concerns have been the same, which is a fear of renewed economic weakness that could dash hopes for a corporate-profit recovery.

Those worries have been reflected most vividly not in the Dow, but in the NASDAQ index of smaller stocks. That index tumbled 10.83 points, or 1.9%, to 553.24 on Wednesday, and now is off 14% from its all-time high in February. The Dow, in contrast, is down 3.6% from its June 1 peak.

In Tokyo, meanwhile, analysts believe investor pessimism has become so severe that strong Japanese government action is needed to boost the economy and lift the despair. But there is no clear consensus on what should be done.

Many American analysts insist that the U.S. market is suffering only a short-term setback, and that no parallels can be drawn with Tokyo.

Profit taking in U.S. stocks is natural after their gains last year and early this year, traders say. And although there are legitimate concerns about the sustainability of the U.S. economic recovery, some money managers believe that second-quarter corporate earnings will look far better than many investors now expect.

“I think second-quarter numbers in general will be good,” said Michael Sherman, investment strategist at Shearson Lehman Bros. He noted that many companies have pumped up production in recent months while keeping costs low by avoiding hiring.

But traders say the market’s biggest immediate problem is investors’ unwillingness to step up and buy, even though many stocks look like bargains. “Buyers are in no hurry,” said analyst Alan Ackerman at Reich & Co.

Concerns over Ross Perot’s wild-card presidential bid and many consumers’ deep-seated suspicion about the economy’s long-term potential are believed to be keeping buyers at bay.

That is creating a vacuum in which stocks can continue to fall sharply, experts warn. Computerized program trading in advance of Friday’s quarterly expiration of key futures and options contracts also is wreaking havoc with prices and driving some would-be buyers away, traders say.

Among Wednesday’s highlights:

* Profit taking and economic concerns slammed many of the stocks that had risen fastest in recent months. Telmex, the Mexican phone company, led the decline as the Mexican market plummeted. NYSE-traded Telmex shares plunged 3 1/8 to 45 3/8.

* Other big losers included GM, down 2 3/8 to 41 5/8; Ford, off 2 1/8 to 45 1/2; Caterpillar, off 2 5/8 to 53 5/8; Motorola, down 2 7/8 to 75 7/8, and Coca-Cola, off 1 3/8 to 39 3/8.

* Retailers sank on fears that consumer spending is waning. J. C. Penney fell 2 1/4 to 67 3/4, Sears lost 1 7/8 to 38 1/2, Kmart dropped 1 1/8 to 21 3/8, and Gap gave up 1 5/8 to 31 1/2.

* Several of the day’s bigger casualties came on disappointing earnings news. Electronics giant Philips tumbled 5 to 16 5/8 after it projected substantially lower earnings for the second quarter, citing poor worldwide demand.

Also, drug firm Upjohn, which said its second-quarter earnings won’t surpass last year’s results, saw its stock drop 1 3/4 to 32 1/4.

Among overseas markets other than Japan, losses were comparatively light. In London, the Financial Times 100-share average lost 17.9 points to 2,598.4.

In Frankfurt, the DAX index slipped 7.32 points to 1,771.78.

Credit

Bond yields slipped as traders increasingly figured that the stock market’s troubles portend another cut in interest rates ahead.

The price of the Treasury’s main 30-year bond rose 5/32 point, or $1.56 per $1,000. Its yield slipped to 7.82% from 7.83% Tuesday.

Despite a Federal Reserve report Wednesday that described a gradually improving economy, many bond investors are betting that the Fed will be forced to lower interest rates again if the stock market continues to reflect disbelief in the recovery.

The Fed is viewed as having much greater flexibility to lower rates following recent inflation reports that showed prices well under control.

The federal funds rate, the interest on overnight loans between banks, was quoted at 3.688%, up from 3.625% Tuesday.

Currency

The dollar settled higher across the board, though trading largely centered on European currencies.

Many dealers took profits in the Swiss franc, which has appreciated sharply against the dollar recently. Some of that money went into German marks, though the dollar held its own there as well.

The dollar closed at 1.575 marks in New York, up from 1.564 Tuesday. The dollar also rose to 127.25 Japanese yen from 126.50.

Commodities

Precious metal futures fell for a second day as inflation fears dissipated. July platinum fell $3 to $361.90 an ounce on the New York Merc. On New York’s Comex, June gold dropped $1 to $341.20 an ounce, and July silver slipped 1.3 cents to $4.10.

Crude oil ended nearly unchanged on the New York Merc. Light, sweet crude for July slipped 1 cent to $22.29 a barrel.