Sellers hammered away at some key blue-chip multinational stocks Wednesday, deepening their summer sell-off amid jitters over near-term earnings prospects.
The Dow Jones industrials lost 132.63 points, or 1.7%, to 7,719.28, although broader market indexes--especially those of smaller stocks--were down only marginally.
The Dow’s loss, its biggest one-day decline since it tumbled 247 points on Aug. 15, revived worries over increasing market volatility, following August’s wild swings.
What’s more, the drop suggested that more investors are looking to bail out of some of the blue-chip stocks which, until midsummer, had been Wall Street’s shining stars since 1994.
Many of those stocks--including Coca-Cola, Gillette and Colgate-Palmolive--already are down 20% or more from their 1997 peak prices.
The stocks have been whacked by concerns that the companies’ robust earnings growth of recent years may be crimped in the short term by the dollar’s strength this year and by the economic turmoil in Southeast Asia.
IBM became the latest target of those worries on Wednesday. The stock sank $3 to $97 after brokerage Goldman, Sachs & Co. issued a report predicting IBM will earn 10 cents a share less than expected in the current quarter. Goldman said it was “increasingly concerned” about the direction of the dollar and its effect on IBM’s earnings.
Still, Goldman left IBM on the brokerage’s “priority” list of recommended stocks. IBM was scheduled to make a presentation at a Salomon Bros. conference after the market closed. The conference was closed to the media.
The dollar’s strength this year--it is up 15% versus the German mark and 8% against the South Korean won, for example--can depress multinational companies’ foreign earnings when repatriated, and also can boost prices of their exports, making it more difficult for them to compete abroad.
IBM has not issued any comments on its third-quarter results, which are not due for at least a month, and a spokesman declined to comment on the market speculation, which surfaced Tuesday.
But Coca-Cola and Gillette, among other blue-chip companies, have acknowledged that the dollar is hurting them. Both issued earnings warnings to analysts in August.
What’s more, the plunge in most Southeast Asian currencies against the dollar since early July may hurt U.S. multinational companies’ results in that region, while also threatening to slow global economic growth in general.
“People are worried that Asia is going into the tank, and that will cause a lot of companies to slow down,” said Rex Wardlaw, a money manager with Wells Capital Management.
Some analysts, however, say the concern about foreign currency translations is overblown. “What most people miss is that companies are much better at managing currency risk,” said Tom Laming, who runs the Buffalo USA Global Fund. “They do a pretty good job of hedging their exposure.”
Also, the dollar has been weakening in recent weeks. It fell to 1.799 German marks Wednesday from 1.811 on Tuesday on fresh signs of strength in Germany’s economy.
Even so, because blue-chip stocks have rocketed since 1994, and still sell for well-above-average price-to-earnings ratios, any hint of trouble will naturally send more investors fleeing for the exits, analysts warn.
As they sell blue chips, some investors in recent months have begun to snap up shares of smaller stocks, which in many cases sell for lower P/Es than big stocks and don’t face the same heavy exposure to foreign business.
On Wednesday, smaller stocks overall were only modestly lower. The Russell 2,000 index of smaller shares edged down 0.85 point, or 0.2%, to 436.90--although the loss still snapped a string of nine consecutive record highs, which were achieved in sharp contrast to the Dow’s weakness.
While losing stocks topped winners by 18 to 11 on the New York Stock Exchange, losers had only a small edge on Nasdaq. The Nasdaq composite index dropped 1% to 1,639.25, weighed down by declines in some of its big tech issues.
A weak bond market also hurt stocks Wednesday. The yield on the bellwether 30-year Treasury bond rose to 6.65% from 6.62%.
Analysts said many investors were also afraid to dip into the turbulent stock market before the appearance of two key reports on Friday: August wholesale inflation and retail sales.
Among Wednesday’s highlights:
* Falling blue chips included AlliedSignal, down $2.38 to $85.06; Coca-Cola, down $1.13 to $57.63; Merck, down $2 to $92.77; and Procter & Gamble, down $4.38 to $129.44.
* Computer-networking issues fell after Cisco Systems initiated some equipment price cuts. Cisco fell $3.50 to $72.50, Ascend Communications fell $2.56 to $40 and 3Com dropped $1.75 to $49.75.
* Bank stocks were broadly lower, with Citicorp down $3.06 to $129 and First Chicago NBD down $3.38 to $73.25.