Another Wave of Selling Hits Stocks; Dow Off 161 Points

By TOM PETRUNO

July 16, 1996 12 AM PT

TIMES STAFF WRITER

The U.S. stock market was pounded by another wave of selling on Monday, triggering fresh warnings about a sustained deep decline and raising concerns about the reaction of millions of relatively new, untested investors. In a sell-off that appeared to have no single catalyst, the Dow Jones industrial average of blue-chip stocks plunged 161.05 points, or 2.9%, to 5,349.51, its lowest level since late January.

Smaller-company stocks, which had led the market in a wild rally in April and May, suffered substantial losses that drove the Nasdaq composite index of such issues down nearly 4% and back almost to its level of Jan. 1.

Analysts said Monday’s tumble was rooted in the same worries over rising interest rates and falling corporate profits that had fueled last week’s market decline, which sliced 3.2% from the Dow between July 5 and Friday.

Many experts suggested that, despite the apparent violence of the selling in recent days, the market could be experiencing nothing more than a historically typical “correction” that could shave as much as 10% from the value of the average big stock before prices stabilize.

But concern also is growing that precisely because this bull market has gone so long without such a 10% pullback--5 1/2 years--Wall Street’s sudden mood change could unleash a torrent of selling by institutional and individual investors eager to take away some of their profits.

“When you go up in a straight line, you can go down in a straight line,” warned Richard McCabe, market analyst at Merrill Lynch & Co. in New York, noting that stock prices had surged spectacularly just over the last 18 months, adding to gains since October 1990.

Major mutual fund companies, which in recent years have taken in record sums from individual investors eager to participate in the long bull market in stocks, reported only mild redemptions on Monday, indicating that most individual investors appear unfazed by the market’s decline.

But with many analysts warning that eroding confidence in stocks is posing the biggest challenge yet to Wall Street’s long uptrend, the actions of mutual fund investors may be key in coming days and weeks to the market’s direction.

The Dow’s loss Monday was its fourth-biggest ever in terms of points, but in percentage terms the drop did not rank even among the index’s 10 worst days.

Still, Monday’s decline compounded stocks’ broad pullback since July 5, when the government reported a surge in new jobs in June, driving interest rates sharply higher and fueling worries about an overheating economy.

Then, last week, a flurry of weaker-than-expected second-quarter profit reports from some well-known U.S. companies spurred renewed selling, as investors feared that the boom in corporate earnings that has supported the 1990s bull market might be ending.

On Monday, jitters over corporate profits were intensified when major airlines launched another fare war, hammering most airline stocks.

Most analysts, however, said Monday’s selling wave wasn’t sparked by any particular event, but rather stemmed from the continuing desire of large, institutional investors to trim back their stock holdings in the face of higher interest rates and weak corporate earnings--historically the two greatest threats to stock values.

“A lot of people have made a lot of money over the last four to five years,” said Howard Gleicher, a money manager at Palley-Needelman Asset Management in Newport Beach. “Now they’re afraid that things are going to change.”

Ricky Harrington, a veteran market analyst brokerage Interstate/Johnson Lane in Charlotte, N.C., estimated that “80% of our brokers have only been in this business for the past three to five years. They haven’t seen a real [sell-off] in stocks,” and thus their behavior in the face of deep pullback is unpredictable, he said.

More troubling to some analysts is that the market’s decline over the past few weeks has not been accompanied by heavy trading volume.

Indeed, Monday’s New York Stock Exchange volume was just 421 million shares, hardly a big day.

What that suggests, analysts said, is that the decline so far is occurring simply because buyers are stepping away from stocks, not because an excessive number of investors have actually sold.

“Buyers are not on the scene--that’s the truth,” said Larry Rice, a trader at brokerage Wedbush Morgan in Los Angeles.

But with the Dow already down 7.4% from its May 22 peak, the risk going forward is that a flood of sellers could soon descend on the market, fueling much more dramatic price declines.

In particular, analysts worry that some significant portion of the millions of mutual fund investors might decide to sell some amount of their stock holdings, forcing fund managers to liquidate a large amount of stock into a market that suddenly has a dearth of buyers.

“If there is any faint hint of a reversal [in mutual fund cash flows], there will be a rush for the exits” by institutional investors, said Glen King Parker, publisher of Market Logic newsletter in Deerfield Beach, Fla.

Other market watchers, however, said bearish analysts were attempting to stoke pessimism in a market that does not face severe problems.

“The amount of despair I’m hearing has happened so quickly that I don’t think it can last,” said Gleicher, noting that short-term mood swings in the market are nothing unusual.

“I think we’re just in the middle of a very healthy correction in prices,” Gleicher said.

Louis Navellier, a money manager in Incline Village, Nev., who focuses on smaller stocks, called this a “great, great time to buy” as some investors dump shares in a panicked rush to get out of the market.

Merrill Lynch’s McCabe said the slump in stocks over the past few weeks is “probably the first break, the warning crack in the bull market.” He predicted that the market would rally again before year’s end, but that many stocks probably have seen their high prices for this bull market.

Bull markets often end when interest rates surge or when corporate profits begin to decline, either of which could signal or occur concurrently with an economic recession.

The U.S. economy has been expanding since 1991. Stocks began to surge in October 1990 after declining 20% or more after Iraq invaded Kuwait in August 1990. A bear market generally is defined as a decline of 15% to 20% or more in major market indexes like the Dow.

Ironically, a continuing slide in stock prices could eradicate one of investors’ current fears: That the Federal Reserve Board will tighten credit soon to slow the economy and dampen inflationary pressures.

If falling share values make investors feel less wealthy, they could cut back on their spending, allowing the economy to slow from what apparently was a heady pace in spring.

Fed Chairman Alan Greenspan is expected to make some reference to the stock market on Thursday, when he testifies before Congress.

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10 Worst Drops

In terms of percentage, Monday’s drop does not come close to ranking in the 10 worst days for the Dow Jones industrial average:

Oct. 19, 1987: 22.61%

Oct. 28, 1929: 12.82%

Oct. 29, 1929: 11.73%

Nov. 6, 1929: 9.92%

Dec. 18, 1899: 8.72%

Aug. 12, ‘32: 8.40%

Mar. 14, ‘07: 8.29%

Oct. 26, ‘87: 8.04%