Stocks Drop on Fears Over Trade, Profits

The Dow Jones industrial average slid nearly 120 points Thursday as fears of a trade war with Japan added to growing skepticism about future company profits.

The Dow Jones industrial average fell 119.10 points, or nearly 1.5%, to 7,938.88, swinging from an early 55-point gain to a 161-point loss before recovering a bit.

Bonds ended barely changed as the trade dispute eroded gains made earlier on mild economic data. The yield on the Treasury’s key 30-year bond was unchanged at 6.39%.

Coincidentally, the stock sell-off came on the 10th anniversary of the Dow’s first single-day 100-point drop. That fall of 108 points came Oct. 16, 1987, representing a 4.6% drop in the Dow; it also came just days before the Oct. 19 crash, when the blue-chip index plunged 508 points.

With 100-point moves now commonplace, analysts said they did not see a sharp pullback on the horizon. But they said the stock market was edgy as investors pored over the flood of corporate earnings news.

Sears Roebuck and Merck led the retreat, falling the equivalent of 40 Dow points after Thursday morning’s release of their third-quarter profit reports.

Broader stock measures also turned sharply lower despite a report showing that retail inflation remained subdued in September even with another sharp increase in energy costs. In contrast to recent trends, smaller-company shares dove sharply with the blue chips.

Wall Street was again rattled by trade tensions with Japan after 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, chief investment strategist at Prime Charter Ltd.

But he added, “I don’t think that will happen. I think cooler heads will prevail.”

There was hope that the dispute will be resolved before any impact is felt. The two sides were still talking late Thursday in Washington.

The news sent the dollar down to 119.65 Japanese yen late in New York, down from 121.16 late Wednesday. The dollar fell to 1.7465 German marks from 1.7470 marks.

Early in the session, stocks and bonds rose sharply after the government reported that the consumer price index rose by only 0.2% in September, in a carbon copy of the August rise. Economists had expected a rise of 0.3%.

On the surface, Thursday’s third-quarter reports by bellwethers such as Coca-Cola, Sears and Compaq Computer seemed to reinforce the trend toward strong results for the July-September period. Investors, however, have remained difficult to please.

“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.”

Coca-Cola, which met analyst forecasts, turned lower in the afternoon and fell 88 cents to $58.94 on the New York Stock Exchange. Compaq beat expectations, but fell $4 to $73.25 as the most active NYSE issue amid concerns about continued profit growth.

“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 Intel warned about profit margins in its earnings report on Tuesday. “If you don’t have a profit-margin story, you don’t have an profit-momentum story.”

It didn’t help that LSI Logic, a smaller semiconductor company than Intel, met profit expectations with its third-quarter report, but warned about its profit outlook. LSI fell $3 to $24 as the second-most-active NYSE issue.

Similarly, Sears beat analyst forecasts, but fell $5.81 to $48.06 as the retailer warned that consumer credit delinquencies will likely hurt its holiday results. Merck, meanwhile, fell $4.63 to $97.63 after posting profits slightly below expectations, prompting a downgrade by Merrill Lynch.

Declining issues outnumbered advancers by a 12-to-7 margin on the NYSE in heavy trading.

The Standard & Poor’s 500-stock list fell 10.49 points to 955.23 after recovering from a 15-point drop, and the NYSE composite index fell 4.59 points to 502.30.

The Nasdaq composite index, down as much as 31 points during the session, fell 23.71 points to 1,699.66.

The Russell 2,000 fell 5.58 points to 457.16 for its third consecutive losing session.

Overseas, Tokyo’s Nikkei stock average rose 2.2%, Frankfurt’s DAX index fell 1.8% and London’s FTSE-100 rose 0.5%.

In commodities, oil prices rose on forecasts for cold U.S. weather and after Iraq stepped up a war of words with the United Nations over Gulf War sanctions.

At the New York Mercantile Exchange, crude oil for November delivery closed 40 cents higher at $20.97 a barrel.

Precious metals prices ended lower, except for palladium, as commodity fund speculators took profits on purchases built up over the last two months, analysts said.

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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