Stocks Slump on Fears Over Trade, Profits
Stocks suffered their worst decline in a month on Thursday, as trade friction between the United States and Japan worsened, and as some key blue-chip companies reported quarterly earnings below Wall Street’s expectations.
The Dow Jones industrials lost 119.10 points, or 1.5%, to 7,938.88, though the index recovered somewhat from a decline of more than 160 points.
The market overall was broadly lower, with losers outnumbering winners by 18 to 11 on the New York Stock Exchange in active trading. And the Russell 2,000 index of smaller stocks fell for a third session, marking the longest consecutive decline in the recently hot index since early August.
Analysts said the market was taken by surprise as the U.S. Federal Maritime Commission voted to order that Japanese ships be denied entry at American ports because shippers did not pay an estimated $4 million in fines.
The maritime commission is “firing a shot over the bow for something seemingly small, a $4-million fine, and these are the kinds of things that can turn into trade wars,” said Scott Bleier,
investment strategist at Prime Charter Ltd. The news sent the dollar tumbling versus the Japanese yen.
The commission’s order comes amid growing tension between the United States and Japan over the latter’s huge trade surplus. U.S. authorities want Japan to take concrete actions to stimulate its sagging economy and thus import demand.
Many investors, however, were more upset Thursday with the latest batch of third-quarter corporate earnings reports than with the trade dispute.
Such bellwethers as drug giant Merck, retailer Sears Roebuck and technology firm Sun Microsystems saw their shares hammered after issuing reports that unnerved investors.
Merck, for example, reported quarterly earnings of 99 cents a share, up 19% from a year ago, as sales also rose 19%. But Wall Street had expected $1 a share.
Analysts said they were concerned by a sales slowdown in two key drugs--Zocor and Mevacor--from the previous quarter. Investors responded by slashing Merck’s stock price $4.63 to $97.63.
Sears, meanwhile, reported quarterly operating earnings of 76 cents a share, a penny above expectations. But the stock dove $5.81 to $48.06 as the company warned that consumer credit problems were worsening.
Both Merck and Sears are in the 30-stock Dow index.
At Sun, earnings were 3 cents a share below expectations, driving the stock to $39 in after-hours trading from $45.63 at Wednesday’s close.
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Even some companies whose earnings met or topped expectations were sold off. Coca-Cola, which met analysts’ forecasts, lost 88 cents to $58.94. And Compaq Computer sank $4 to $73.25 even though its quarterly results of 71 cents beat the average estimate of about 68 cents.
“If you read between the lines, Compaq was saying it will have a hard time increasing profit margins,” said Michael Metz, chief investment strategist at Oppenheimer & Co., noting that computer chip giant Intel warned about profit margins in its earnings report on Tuesday. “If you don’t have a profit-margin story, you don’t have a profit-momentum story.”
“I think the big issue is that we’re not getting the blowouts in earnings that some folks expected,” said David Shulman, chief market strategist at Salomon Bros. “Earnings have been in line, but you’re not seeing the kind of upside surprises that investors have come to look for.”
Analysts cited other signs Thursday that investors’ mood to take profits in financial markets may be rising. The bond market rallied early in the day on the benign September consumer inflation report, but yields finished mostly unchanged. The 30-year Treasury bond yield, which fell as low as 6.33% at midday, ended flat at 6.39%.
And the powerful rally in smaller stocks that has been ongoing since early August has hit a wall this week. The Russell 2,000 index of smaller shares, which has risen with few interruptions since early August, lost 5.58 points, or 1.2%, to 457.16 on Thursday, the third consecutive decline.
The Nasdaq composite index, heavy with tech issues, sank 23.71 points, or 1.4%, to 1,699.66 on Thursday.
“U.S. stock investors are falling out of love,” said J. Thomas Madden, chief investment officer at Federated Investors in Pittsburgh. “If their confidence is shaken in any significant way, they’re cutting their position quickly.”
Some investors may also have the jitters over the historical significance of this week: A decade ago, on Oct. 19, 1987, the Dow index plummeted nearly 23% amid a torrent of worries over interest rates, inflation, corporate earnings and trade issues.
Among Thursday’s highlights:
* Stocks moving on earnings reports included LSI Logic, down $3 to $24; Apple Computer, down $2.31 to $21.50; and Reebok, down $2.50 to $43.50.
* Tech stocks in general were weak. National Semiconductor dropped $2.75 to $36.63, Intel lost $1.31 to $85.38, and Texas Instruments lost $5.25 to $129.75.
* On the upside, auto parts firm Federal Mogul rose $3.75 to $45 after it agreed to buy British rival T&N; for about $3 billion.
* Some utility shares gained amid general market weakness. American Electric Power rose 31 cents to $46.63; Edison International rose 19 cents to $25.06.
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Earnings Victims
Investors were merciless Thursday in hammering some big-name stocks whose companies reported disappointing third-quarter earnings. A sampling:
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Stock Thursday Close Thursday Change Drop LSI Logic $24.00 -$3.00 -11.1% Sears 48.06 -5.81 -10.8 Sun Microsystems 42.31 -3.31 -7.3 Compaq 73.25 -4.00 -5.2 Cummins Engine 69.00 -3.44 -4.8 Merck 97.63 -4.63 -4.5
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Source: Times researchers
