Steep Stock Slide Rattles Some Bulls
U.S. stocks suffered the steepest sell-off of the year Tuesday, propelling the Dow Jones industrial average back toward 1997 levels and sending some prominent bulls into retreat.
Bond and gold prices rose as investors sought havens, and the dollar fell sharply against the German mark and closed lower against the Japanese yen for the first time in a week.
The stock market deterioration, which has spread from small stocks to the very largest, reached new levels Tuesday, with the Dow index plunging 299.43 points, or 3.4%, to 8,487.31.
The loss was the Dow’s third-largest in point terms and is eclipsed only by the October crashes of 1987 and 1997, both more than 500 points. The drop has already erased a spring and summer’s worth of gains in the world’s most-watched index.
The Nasdaq composite index, laced with technology issues, lost 65.46 points, or 3.5%, to 1,785.64. It was the second-biggest point drop for the index, which fell to its lowest level since June 18.
New York Stock Exchange volume was 834 million shares, the second-heaviest ever. Declining issues outpaced advances 2,613 to 508.
The intensified selling, amid worries about cooling world economic and U.S. corporate profit growth, has some bulls, most notably Ralph Acampora of Prudential Securities, backing away from forecasts of a Dow at 10,000 in 1998 and setting sights lower--in some cases much lower. Acampora said a Dow-10,000 is now “less than 50-50” as a prospect and that a severe correction or bear market is likely.
“The Dow could drop 15% to 20% from its 1998 closing high,” or to a range between 7,470 and 7,937, Acampora said. The Dow closed 1997 at 7,908.25.
At its current level, the Dow is up 288.86 points--a mere 3.5%--from its close of 8,198.45 on Aug. 4, 1997.
Not since early March has the Dow treaded ground so low, and the average is now more than 9% off its all-time high of 9,337.97, set July 17, just shy of the 10% needed to count as a “correction” in traditional terms.
Bulls could still be found, to be sure. Robert Froehlich, chief investment strategist at Scudder Kemper Investments, said long-term investors have a valuable opportunity at hand.
“Fundamentally, I think this selling is an overreaction to events,” Froehlich said. “Give me a two-year horizon and I think you’ll kick yourself if you didn’t take advantage of this buying opportunity.”
Froehlich noted that in some ways this correction differed from some others in this bull market, many of which had been spurred by inflation worries of a too-hot economy.
That is no longer the case, with Asia and the strong dollar weighing on exports and rising labor costs indicating potential pressure on profits.
What has set the most recent trading patterns apart from the volatility that hit the market in late spring is that this time, money appears to be leaving stocks overall, rather than moving from sector to sector.
Even traditional defensive names in the drug, consumer goods and banking industry are suffering as portfolio managers beef up cash positions and shift some funds into the bonds.
“It does not appear there is any safe place to be except maybe bonds, gold and cash,” said Hugh Johnson, chief investment officer at First Albany Corp.
After the market’s close, individual investors herded into the Charles Schwab Corp. offices at the World Trade Center to check how their stocks performed.
Although some said they felt jittery, most downplayed their fears. One investor, 25-year-old computer technician Andrew Johnson, said he was not worried in the least.
“You have billions of dollars pouring into mutual funds every day,” he said. “This is a long way off from being a problem.”
However, even mutual funds are showing some evidence of strain. Fidelity Investments, the nation’s largest fund group, said it had slight outflows from stock funds early Tuesday and inflows to money market and bond funds.
