Profit Fears, Rising Dollar Slam Wall Street Again
Concern about weakening profits at major U.S. companies hit stocks hard again Friday, as the Dow Jones industrials lost almost 144 points to cap a second consecutive week of heavy selling.
Despite a second-quarter economic growth report that was generally viewed as favorable on Wall Street, investors reacted to the mounting 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.
Meanwhile, the dollar surged to 144.65 yen from 143.66 on Thursday, and now is near the eight-year high of 146.14 set June 15. That is raising fears that Asian currencies in general may begin another devaluation spiral, with serious economic implications.
The yen sank after Japanese Finance Minister Kiichi Miyazawa hinted Japan may not intervene to support the currency.
U.S. 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. corporate earnings would subside by late 1998.
But various big firms have warned lately that Asia-related woes will linger through the year.
“Investors have been reluctant to take Asia seriously and now they’re being forced to,” said Elizabeth Mackay, investment strategist at Bear, Stearns & Co.
Coming on top of the persistent weakness afflicting most smaller stocks, the sudden troubles of the big-name stocks are raising concern 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.
In a possible warning 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.
Many analysts disagree, however. They believe the market is merely in a short-term “correction,” not unlike temporary declines that pulled the Dow down 9.8% in spring 1997 and 13% last fall.
On Friday, the government said 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. 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. Bond yields ended the day slightly lower.
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 First Call Corp. Growth is the slowest since 1991.
That might be acceptable to investors if they could look ahead to better growth. But “I don’t see this as repairing itself very quickly,” said Marshall Acuff, strategist at Salomon Smith Barney, referring to earnings worries and other market concerns.
“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, after falling $4.50 on Thursday when it reported a 12% quarterly earnings gain but also warned of Asia-related weakness in earnings ahead.
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. When a consumer products company prized for its steady profit gets hit, she said, investors begin to fear that other, similar blue chips could be vulnerable.
* Kellogg tumbled $2.19 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 plunged 11.8%, off $5.63 to $41.88, after the coffee chain said July sales at stores open at least a year rose 2%, while 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
