143-Point Drop Caps Dow’s Worst Week Since Jan.
Concern about weakening profits at major U.S. companies hit the stock market hard again Friday as the Dow Jones industrial average lost almost 144 points to cap its worst week since January.
Despite an economic report that was generally viewed as favorable on Wall Street, investors reacted Friday to the growing realization that corporate profits are not likely to rebound in the second half of 1998, analysts said.
The Dow lost 143.66 points, or 1.6%, to close at 8,883.29. Broader-based averages suffered bigger losses. The Standard & Poor’s 500 stock index fell 22.28 points, or 2%, to 1,120.67. The Nasdaq composite index lost 2.5%, falling 47.19 points to 1,872.39.
Stocks’ advance for much of this year--in a powerful surge from January through late April and in a more modest, mostly blue-chip rally from mid-June to mid-July--was based in part on the belief that the negative impact of the Asian economic crisis on U.S. earnings would subside by late 1998.
But various big companies have warned lately that their Asian-related woes will linger throughout the year.
“Investors have been reluctant to take Asia seriously and now they’re being forced to,” said Elizabeth Mackay, chief investment strategist at Bear, Stearns & Co.
Coming on top of the persistent weakness afflicting stocks of most smaller companies, the troubles of the larger issues are raising concern among some on Wall Street that a “stealth” bear market is underway.
While a relative handful of blue-chip stocks led the market to new highs just two weeks ago, the vast majority of smaller stocks have floundered for months.
Through last Tuesday, in fact, the average stock was down an eye-popping 24% from its 52-week high, according to figures compiled by brokerage Salomon Smith Barney.
On Nasdaq, home to most small stocks, the average decline was an even larger 35%.
In a possible warning sign of a market meltdown, a host of so-called technical factors--such as the number of stocks making new highs, and the market’s overall trading volume--peaked months ago, said Richard Eakle, head of investment advisory firm Eakle Associates in Fair Haven, N.J.
“In effect, a bear market is underway” he said. The “ingredients are falling into place.”
A government report Friday showed that the U.S. economy grew 1.4% in the second quarter. That was greater than the 0.2% expected by many economists but far less than the 5.5% first-quarter figure.
The data clearly showed the economy to be slowing, in large part because of Asia’s effects, experts said. Still, the GDP figure soothed fears among some that the U.S. economy could slip into a recession.
What’s more, the moderate growth eased another concern--that the Federal Reserve Board would boost interest rates in the near future.
But investors now are focused on corporate earnings, which ultimately underpin stock prices.
Second-quarter earnings for companies in the S&P; 500 are up an anemic 2.8% from a year earlier, according to earnings tracker First Call Corp.
On average, companies have topped analyst estimates by 2.5 percentage points. But that doesn’t excite many investors, considering that analysts have lowered estimates dramatically, said John MacNeil, an equity strategist at Salomon.
“Even though companies are coming in at or above sharply reduced expectations, I don’t see people saying the outlook is tremendously improved,” he said.
Added Marshall Acuff, another Salomon equity strategist: “I don’t see this as repairing itself very quickly. All these issues are going to remain on the table past Labor Day and into the fall.”
Among Friday’s highlights:
* Procter & Gamble lost $4.25, or 5.1%, to $79.38. Bear Stearns downgraded the stock to “attractive” from “buy” a day after the company warned that weakness in Asia and competitive pricing could hurt earnings for the coming year.
P&G;’s troubles spooked the market, Mackay said, because until now the bulk of companies reporting Asia troubles have been technology- or commodity-oriented. But when a consumer products company prized for its steady sales gets hit, she said, investors become worried that other companies could be vulnerable.
* Kellogg tumbled $2.19, or 6.2%, to $33.25 after the big cereal company said second-quarter earnings fell 17% and warned that sales could slump further because of heavy competition from lower-priced brands.
* Starbucks sank 11.8%, falling $5.63 to $41.88 on five times its average trading volume. The coffee chain said July sales at stores open at least a year rose 2%, but analysts had expected 5%.
Market Roundup, D4
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Damage So Far
The stock market’s recent pullback has left blue-chip stock indexes down 5% to 7% from their highs for the year, while small-stock indexes have plummeted nearly 15%. A sampling:
*--*
Index 1998 high Fri. close Decline from high Dow industrials 9,337.97 8,883.29 --4.9% S&P; 500 1,186.75 1,120.67 --5.6 Dow utilities 295.40 278.65 --5.7 NYSE composite 600.75 565.27 --5.9 Nasdaq composite 2,014.25 1,872.39 --7.0 S&P; mid-cap 380.67 345.76 --9.2 Dow transports 3,686.02 3,230.31 --12.4 S&P; small-cap 206.18 176.79 --14.3 Russell 2,000 491.41 419.75 --14.6
*--*
Source: Times research
