Stocks Plunge on Budget Fears : Economy: Dow falls 101 points, largest one-day loss in four years. Nervous investors await the end to federal stalemate and the Fed’s decision today on interest rates.
Wall Street sent Washington a no-confidence vote Monday as investor fears over the federal budget stalemate helped send the stock market tumbling, with the Dow Jones industrial average recording its biggest one-day drop in more than four years.
In a session also marred by a rare delay in the opening of trading due to a computer glitch, the blue-chip index plummeted 101.52 points to 5,075.21. It was the biggest daily point loss since Nov. 15, 1991, when the index plunged 120.31 points. Other major stock indexes also posted sharp declines.
Monday’s drop was the Dow’s seventh-worst point decline ever. But, on a percentage basis, the 2% decline was less severe than the 3.9% drop in November 1991 because the market is now trading at much higher levels.
Despite Monday’s slide, most analysts weren’t ready to forecast that the market’s historic rally is over. With prices up an astonishing 30% this year, they noted that it’s common for investors to sell at various points to lock in profits--especially at year’s end for tax reasons and if they are growing more pessimistic about the economic outlook.
A variety of factors combined Monday to sour investor psychology. Chief among them: Concern that the Federal Reserve Board’s Federal Open Market Committee--which sets the direction of U.S. monetary policy--might not lower short-term interest rates when it meets today, as many on Wall Street had anticipated.
Speculation mounted that the central bank won’t act because the federal budget negotiations remain stalled. Another breakdown of budget talks threw the federal government last weekend into its second partial shutdown in two months.
President Clinton offered Monday to meet with Republican congressional leaders to try again to break the impasse and call 260,000 idled federal employees back to work. Senate Majority Leader Bob Dole (R-Kan.) and House Speaker Newt Gingrich (R-Ga.) responded that they were willing to meet with him, but it remained unclear whether a meeting would take place.
Although the fiscal mess has been festering for weeks, “the reason it seemed to have such immediacy on the markets was the concern that [it means] the Fed will not cut interest rates,” said David Bostian Jr., chief investment strategist at Herzog, Heine, Geduld Inc. in New York.
The apprehension surrounding the Fed’s course also triggered a sharp decline in bond prices Monday, which then spilled over into the stock market.
Many economists and analysts expected the Fed to lower rates to help the faltering economy avoid a recession in 1996, particularly with recent reports showing lackluster retail sales and consumer confidence. Investors are worried that if a recession occurs, corporate profits will dwindle or evaporate altogether.
Some were still predicting Monday that the Fed will ignore the budget battle and cut rates anyway. “I expect the Fed will move ahead so it doesn’t look like it’s under the political thumb of Congress,” said Mickey D. Levy, chief financial economist at NationsBanc Capital Markets Inc. in New York.
Another major factor in Monday’s steep drop in stock prices was worry over anemic projections for corporate profits. It’s been robust gains in companies’ earnings this year--fueled by stable economic growth, low inflation and low interest rates--that have lifted the stock market to one of its best showings in history during 1995.
But some computer makers and other technology firms--including Apple Computer Inc. and Advanced Micro Devices Inc.--have already reported earnings troubles recently, and Wall Street has been quick to punish their stocks in response.
That sell-off continued Monday and the Nasdaq Composite Index, which is laden with technology shares, skidded 2.7%, worse in percentage terms than the loss by the Dow Jones industrials.
Forecasting the course of this market has been an even riskier undertaking than usual. When the Dow Jones average hit 4,000 last February, few expected it would hit 5,000 only nine months later and then climb to a record 5,216.47 last Wednesday.
Along the way the Dow suffered a major “correction” last July 19 when the index dropped 135 points before recovering later that day to close with a 57-point decline.
Still, some analysts found reason to worry after Monday’s steep decline. It marked the market’s third straight loss, and “I wouldn’t be surprised to see the sell-off continue for the rest of this year,” said A. Gary Shilling, who runs an investment firm that bears his name in Springfield, N.J.
“The acid test will be what happens on Jan. 2,” when tax-related selling and other year-end considerations are behind investors, he said.
Monday’s rocky performance was exacerbated by an unusual event on Wall Street: A delay in the opening of trading.
The New York Stock Exchange opened at 10:30 a.m. EST, one hour later than normal, because of a glitch in its computer system. That meant stock traders had plenty of time to take their cue from the bond market, where prices already were sinking.
“Bonds were down almost a point by the time they opened stocks,” Shilling said.
David Jones, economist at the bond dealer Aubrey G. Lanston & Co. in New York, said: “All of the drop in bond prices and the rise in yields was related to the lack of a budget deal.”
The Treasury’s bellwether 30-year bond Monday tumbled more than 1 1/2 points, or $15 for every $1,000 in face value. The bond’s yield, which moves inversely to its price, soared to 6.20% from 6.09% late Friday.
The last time the Big Board’s opening was delayed was Dec. 27, 1990, when a fire in a utility transformer in Lower Manhattan knocked out power to the exchange.
