Dow’s 160-Point Loss Steepest in 8 Months
Blue-chip stocks staged their biggest one-day retreat in eight months Thursday, as rising interest rates pounded the financial services and utilities sectors and a court ruling in a major smoking case pummeled the tobacco stocks.
The Dow Jones industrial average dropped 160.48 points, or 2.3%, to 6,878.89, its biggest point decline since July 15.
Some Wall Street experts believe the slide may mark the end of the period of “irrational exuberance” among investors that Federal Reserve Board Chairman Alan Greenspan has been warning about since early-December.
Market strategist Hugh A. Johnson Jr. of First Albany Corp. said the sell-off has the potential to go further than pullbacks last summer and at the end of 1994 because “this market is much pricier.”
Government data released Thursday showed a larger-than-expected 0.8% gain in February retail sales, leading more investors to conclude that the Fed will raise short-term interest rates at its March 25 meeting, to cool the economy and keep inflationary pressures subdued.
Bond prices tumbled sharply in reaction, causing yields, which move in the opposite direction, to hit their highest levels since Sept. 24. The yield on the benchmark 30-year Treasury bond reached 6.96%, up from 6.88% on Wednesday.
Meanwhile Thursday, tobacco stocks recoiled after the Mississippi Supreme Court said it will allow the state to proceed with a landmark lawsuit seeking to recover public money spent treating smoking-related illnesses. Philip Morris dove 12 points, or nearly 9%, to 126 on the New York Stock Exchange, accounting for nearly a quarter of the Dow’s drop.
Although the jump in bond yields was the direct impetus for Thursday’s sell-off, there have been warning signs for weeks. Interest-sensitive utility stocks have been losing altitude for more than a month. The Dow Jones utilities average has fallen 7.9% since hitting a recent peak Jan. 22.
“The interest-sensitive sector leads the market, so when there are warnings about interest rates, investors should sit up and take notice,” said Richard Eakle, a New Jersey-based market analyst, who expects a 5% to 10% correction among the large-capitalization stocks. That would mean a loss of up to 700 points on the Dow.
Also, the Nasdaq 100-stock index, top-heavy with such key technology issues such as Intel, Cisco Systems and Oracle, is down more than 9% since reaching its own peak on Jan. 22.
But the Dow, composed of 30 of America’s biggest and best-known companies, had just pushed to a new high of 7,085.16 on Tuesday. For months, the Dow has outperformed broader-market indicators as smaller stocks have faltered.
“The troops have been suffering more than the generals,” Eakle said.
But the generals, including not just Philip Morris but such market leaders as IBM, Procter & Gamble and Eastman Kodak, took it on the chin Thursday. And banks, whose borrowing costs would rise if the Fed raised rates, were among the biggest decliners. NationsBank fell 3 to 59 3/4, Citicorp slumped 5 1/2 to 117 1/4 and Chase Manhattan tumbled 4 3/4 to 99 1/8.
The broader-market indices, where pullbacks were already well underway, shed less blood on Thursday, amid only average trading volume. The Standard & Poor’s 500 index slid 14.70 points to 789.56, down 1.8%, and the Nasdaq composite index fell 10.85 points to 1,293.28, down 0.8%.
Still, the NYSE showed its broadest decline since Dec. 11, with losers outnumbering winners 2,101 to 534.
Several forthcoming economic reports could push stock and bond prices down deeper. The producer price index for February--it measures inflation at the factory level--will be released this morning, as will February’s industrial production figures.
“We’d been saying that we were only three ugly reports away from a Fed tightening,” Lehman Bros. economist Joe Lavorgna said Thursday, adding, “Employment and retail sales are two, and that may be all it takes.”
Last week’s employment report shows that a construction boom made February the hottest month for hiring since the previous May. To Wall Streeters worried about inflation and interest rates, that’s an ugly report.
On Monday, the Dow Jones industrial average will take on a new look, as the venerable index sheds four stocks--Bethlehem Steel, Texaco, Westinghouse Electric and Woolworth--and replaces them with Johnson & Johnson, Travelers Group, Hewlett-Packard and Wal-Mart.
Dow Jones said it is making the move to make the index more reflective of the changing U.S. economy, but the changes also have the potential to make the Dow more volatile. The way the Dow is calculated, the higher a stock’s price, the greater the effect that percentage changes in its price have on the overall index. For example, a 1% drop in IBM would be $1.43 and would subtract about 4.40 points from the Dow. But a 1% drop in Woolworth is only 22 cents, for a 0.69-point drop in the Dow.
With the newcomers averaging about 49 a share, compared with about 37 1/2 for the four retirees, the Dow could swing a bit more wildly beginning Monday.
Among Thursday’s highlights:
* Some retail issues were among the few gainers, in the wake of the retail sales data. Home Depot rose 5/8 to 57, Lowe’s rose 5/8 to 37 5/8 and Gap Stores gained 1/8 to 35 1/8.
* Among tech issues, Oracle rebounded 2 to 36 1/8, but Intel lost 1 1/2 to 141 1/4 and Compaq lost 1 1/8 to 78 1/4.
* The soon-to-be evicted Dow tenants all declined. Woolworth fell 3/4 to 22 1/4, Westinghouse lost 1/8 to 18 7/8, Texaco fell 1 7/8 to 100 7/8, and Bethlehem Steel was off 3/8 to 8 3/8.
The new entrants were mixed: Travelers was off 1 3/4 to 52 7/8 and J&J; fell 7/8 to 58 3/4. HP rose 1 3/4 to 52 7/8 and Wal-Mart gained 1/4 to 29.
* TRADING HALTED
Boston Group LP, a Century City-based penny stock brokerage, was forced to suspend trading operations. D2
