Dow Plunges 157; 2-Day Fall Biggest Since Gulf War
In its worst two-day drop since the Gulf War broke out in 1990, the Dow Jones industrial average plunged 157.11 points Monday, raising fears that investor psychology has turned markedly worse and that more declines could be in store.
The pullback, adding to a 140-point loss that ended last week’s trading, is by no means a stampede so far. While the widely watched Dow has now lost 7% since peaking March 11, it is only back to where it was Jan. 8--meaning investors have lost two months of gains.
But the greater nervousness among investors, accelerated when the Federal Reserve Board raised interest rates last week for the first time in two years, could turn a rather modest decline into a deeper sell-off, some analysts fear. While there were few signs of panic among individual and professional investors on Monday, they nonetheless are worried that rising interest rates will hurt corporate earnings and, in turn, stock prices.
Continued evidence of stronger-than-expected economic growth could push rates even higher, investors fear. Rising rates may also make government bonds, with higher yields, relatively more attractive to investors.
As the stock market soared last winter and Fed Chairman Alan Greenspan issued repeated warnings that stocks were overvalued, many analysts predicted a “correction” of 10% or more, which may be what is happening now. The dramatic market gains of the past few years--under which the Dow average has doubled in value during the 1990s--could not be sustained forever without some major pullback.
“The short-term mood has blackened substantially,” said Alfred E. Goldman, director of market analysis for the brokerage firm of A.G. Edwards in St. Louis.
The Dow’s two-day loss of 4.32%, to Monday’s close of 6,583.48, is the worst since a 4.63% drop Aug. 22-23, 1990, after Iraq invaded Kuwait. But in total points, the 297.22 two-day point drop is the second-worst, trailing only the 616.35 loss in a two-day crash in October 1987.
Overall, the blue-chip indicator has lost 501.68 points--just over 7%--since closing at an all-time high of 7,085.16 on March 11.
The Dow gets attention because it tracks 30 of America’s largest and best-known companies, but the fallout has been much worse among smaller stocks. The Nasdaq Stock Market, bristling with technology companies, has tumbled 12% since its Jan. 22 peak. The Standard & Poor’s 500-stock index is off 7.25% since its Feb. 18 peak.
Marshall Acuff, stock strategist at the brokerage Smith Barney, said the Dow could fall to the “low-6,000 range,” or twice as far as it has fallen so far. “The psychology is beginning to deteriorate,” he added.
But the experts can only guess whether investors will wait out the downturn or rush out of the market, turning an orderly retreat into a rout.
While the market showed “a high degree of giddiness” as the Dow approached 7,100 and was overdue for a correction, A.G. Edwards analyst Goldman said he believes the downturn will be “measured in weeks rather than months.”
He disputed conventional wisdom that many mutual fund investors would turn skittish at the first serious downtown, saying: “I think they’re in it for the long term.”
With the economy still in good health, with corporate earnings up and inflation moderate, “the dominant mood is still wanting to be in stocks,” Goldman said.
Southern California investor Carol Johnson said she is not bolting. While she found Monday’s decline frightening, she said she has no intention of selling her $400,000 in stock funds. In fact, Johnson bought more stock on Monday.
“Last July I yanked out about $100,000 when the market dropped and all I did was lose money,” said Johnson, a retiree. “I’m holding on this time.”
On the other hand, Peter Hemar, a self-employed attorney in Pacific Palisades, said such market swings make him very nervous about his retirement savings.
“It makes me think about selling,” said Hemar, 48. “I’m not rushing out to do so--but it makes me consider it.”
Monday’s decline did not seem to prompt widespread selling among mutual fund investors. Most, like Johnson, seemed willing to ride out the market. Data about whether more investors were pulling money out of mutual funds on Thursday or Monday were not available. Based on anecdotal evidence from some of the nation’s largest mutual funds, however, redemptions did not seem to be up significantly.
Still, the last two days of market action are likely to contribute to a further slowing of new money into stock funds.
As important as last Tuesday’s Fed action was--raising to 5.5% from 5.25% the rate banks charge each other for overnight loans--investors seemed to focus on another key interest rate: the yield on 30-year U.S. Treasury bonds. When the T-bond rate crept past 7% last Thursday for the first time in six months, it sparked the 140-point sell-off. The stock market was closed for Good Friday, but the long weekend did not change matters.
The 7% mark apparently was a psychological threshold for many investors. With the stock market wobbly after its stratospheric climb, government bonds at 7% suddenly looked like a safe place for their money. Somehow, they had not seemed so attractive at 6.98% the day before.
The flow of money from the stock market into Treasury bonds, which continued Monday, stabilized the bond market. Prices and yields on the 30-year T-bond stayed almost even Monday, compared with the end of last week.
Among the most-bullish investors during the upswing have been those who have poured money into stock-market-index mutual funds. While most mutual-fund managers try to beat the performance of the Standard & Poor’s 500 or other market indices, index-fund managers try to mirror it by buying blocks of the stocks that make up the indicators. Thus, investors in index funds are expressing faith in the broad market rather than in any stock-picking philosophy or market sector.
So far, they have not lost faith, according to Gus Sauter, a principal at Vanguard. Although new-money flows have slowed, Sauter said, there has not yet been a day when redemptions have exceeded inflows.
But if a rapid outflow does develop, Vanguard--like the New York Stock Exchange--has plans to deal with it. The firm has drafted detailed procedures for handling a wave of redemptions, so that it will not have to invent an emergency plan in the midst of a crisis.
Sauter said he hopes investors will become more realistic about the returns they are likely to get from the stock market. Stocks have generated 15% average annual returns over the last decade, a historical anomaly that Sauter said has “a very slim chance of recurring.”
Stock markets in Japan, Australia and elsewhere in Asia reacted to the Wall Street slide with steep drops of their own as they opened today.
In Tokyo, stocks fell sharply today in sympathy with Monday’s fall in New York. The benchmark Nikkei 225 index fell as much as 1.76%, or 316.83 points, to 17,686.57 during afternoon trading. The index had fallen to 17,529.05, its lowest since Jan. 28, in the morning session. The average fell 186.32 points Monday. “The Tokyo market is being directly affected by the New York fall,” said Hisao Suzuki, general manager of trading at Yamaichi Securities.
The Australian stock market was also substantially lower at today’s opening, with the All Ordinaries index of share prices at 2,354.5, down 67.8 points, or 2.8%, from last Thursday’s close. Brokers said the fall was compounded by the market’s having been closed Friday and on Monday for the Easter holiday.
Monday’s Dow downturn did not come close to testing the recently revised “circuit breaker” mechanisms that the New York Stock Exchange has put in place to prevent a market meltdown.
Under these rules, if the Dow drops 350 points, there is a half-hour halt in trading. A 550-point drop triggers a one-hour halt. Those triggers were revised upward in February from 250 and 400 points, respectively. They were adopted after an analysis of the 1987 crash indicated that giving the market a breather might help snap a freefall.
Less severe trading “collars,” which restrict computer-program trading when the Dow either rises or falls more than 50 points, were put in place Monday, as they have been many times in the past.
Mulligan reported from New York and Vrana from Los Angeles.
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Dow’s Round Trip
The Dow Jones industrial average’s recent dive has wiped out most of the gain it racked up in the first two months of the year.
Close on 1/3/97: 6,544.09
Monday’s close: 6,583.48
Source: TradeLine
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