Dow Jostled by Reports of Worldwide Sell-Offs

U.S. stock prices took a wild roller coaster ride Friday after markets worldwide sold off again on worries that the economic woes already evident in Asia and Russia may spread to Latin America, Europe and even the United States.

In what amounted to another global “flight to quality,” investors dumped stocks in nearly every world market, switching some of that money into the haven of U.S. Treasury bonds and driving long-term interest rates to record lows.

After falling more than 283 points in the morning, the Dow Jones industrial average ended down almost 78 points as bargain hunters triggered a rally at the end of the day.

The latest global sell-off in stocks was fueled by a torrent of bad news on several continents. For example, investors feared that an imminent currency devaluation in Venezuela could spread to Brazil and Argentina and spark a Latin American economic crisis.

In Germany, investors bailed out of the market--sending the country’s main stock index down 5.9%--on fears that German banks may be hurt by the deteriorating economic picture in Russia, where the banks have lent heavily.

Experts fear the crippling currency and debt problems engulfing much of East Asia could infect the economies of many more nations, igniting political instability and possibly even a retreat from capitalism. Foreign woes also could badly damage the relatively strong U.S. and European economies that so far have been able to withstand the Asian financial crisis, analysts warn.

“We really don’t have the resources to deal with this raging virus when we find it present in so many countries,” said Peter Anderson, chief investment strategist at American Express Financial Advisors in Minneapolis.

“Increasingly, it seems that the U.S. and Western Europe are islands in this sea of turmoil,” he said, “and it may only be a matter of time before the U.S. and Europe are in difficult economic straits.”

After four weeks of declines in most global markets, the trigger for Friday’s accelerated sell-off was a financial meltdown in Venezuela that threatened to spiral into Brazil and Argentina.

Venezuela is consumed by a debt-and-currency crisis that has smashed stock markets throughout the region.

Bond values in Venezuela sank this week as investors worried about the country’s ability to repay its obligations. Those fears walloped debt issued by other Latin American nations as well.

Experts fear that Venezuela will be forced to devalue its currency, the bolivar. That could provoke a string of devaluations in the region, such as the one that occurred this week in Russia, and the multiple devaluations that kicked off the Asian financial crisis last year.

On Monday, Russia effectively devalued the ruble and said it would delay repayment of billions of dollars of debt. The action was needed, Russian officials said, to prevent a government bankruptcy or a collapse of the banking system.

As weakened economies devalue their currencies, they slash their own purchasing power for foreign goods, especially U.S. exports. Fear of devaluation also sends investors fleeing a country’s stocks to avoid immediate losses on their securities.

On Friday, Venezuela’s battered stock market plunged 8.4%, while Argentina’s lost 7.8% and Mexico’s sank 2.4%.

For the U.S. stock market, spreading global turmoil comes at a time when investors already are unsettled over questions about President Clinton’s legal troubles and the specter of a drawn-out showdown with Arab terrorists.

Such concerns could lead to more market volatility when trading resumes Monday. Analysts are deeply divided over whether the late rally in the U.S. market Friday marked the end of a recent “correction” or the latest evidence of an emerging bear market.

At its morning low Friday, the Dow was off 10.8% from its July 17 peak of 9,337.97. At Friday’s close, off 77.76 points at 8,533.65, the Dow was down 8.6% from its peak.

After an early rush of selling, the blue-chip index partially recovered late in the day as large institutions bought stocks in the hope they had fallen as low as they would go.

Broader measures of stocks, however, suffered greater damage. The Nasdaq composite index, which includes many technology stocks, fell 34.84 points, or 1.9%, to 1,797.61. The stocks of many banks, which have loans to Latin America, and airlines, which service the region, fell between 2% and 3%.

To be sure, however, not all the news was bad.

The Dow rallied strongly early in the week and, after its late-day surge Friday, was up 1.3% for the week. It was the first weekly gain in five weeks.

The Dow’s 200-point recovery from its trough Friday served as another indication that institutional investors are prepared to move aggressively back into stocks if they believe the market is near a low. The Dow has slumped below 8,400 five times in the last three weeks but has bounced back from that level each time.

While there’s no guarantee the pattern will continue, it demonstrates that investors have money ready to fuel the market.

“Big investors are on the sidelines saying, ‘I’ll dabble in stocks with the market down 300 points and maybe I can pick the bottom,’ ” said Steve Hurd, a trader at J. Alexander Securities in Los Angeles.

In fact, many Wall Street experts cling to the belief that the doomsday market scenarios are dramatically overblown, arguing that the U.S. economy is sufficiently robust to withstand weakness abroad.

They point to still-vibrant consumer spending and low inflation.

“There’s a lot of confidence that shows up in strong consumption spending and the buy-the-dip mentality in the stock market,” said David Malpass, international economist at Bear Stearns in New York. “And business confidence is high. [All] that keeps the economy from sliding.”

What’s more, with many investors seeking sanctuary in “safe” securities on Friday, the yield on the 30-year Treasury bond--a benchmark for other long-term interest rates, including mortgage rates--fell to 5.44%, from 5.51% on Thursday.

That 5.44% is the lowest since the government began regular sales of 30-year bonds in 1977.

The bond yield also now is below the Federal Reserve Board’s benchmark short-term rate, the federal funds rate, which the Fed is holding at 5.5%.

Normally, long-term yields are higher than short-term yields, because investors who tie up their funds for long periods expect to be compensated for taking greater risk.

Some experts believe the lower yield on the 30-year bond is a signal that the U.S. economy will slow so significantly soon that the Fed will be forced to cut short-term rates as well.

But others dismiss this notion, arguing that bond yields have plummeted largely because of the flight to safety and that there is no deeper economic or market message in those yields.

Still, with global financial troubles seeming to become more contagious, many observers fear that the U.S. and Europe will eventually be roped into recessions. Common sense, they say, holds that if economies and markets are falling like dominoes, even the strongest will eventually succumb.

In Britain, stocks sank 3.4% on Friday, while the French market dropped 3.5% on economic worries.

Similar fears hammered U.S. bank stocks on Friday, in particular.

Pessimists see more trouble ahead. In the worst-case scenario, a faltering U.S. stock market would make consumers feel poorer and persuade them to cut back on their spending, perhaps assuring a recession here and in Europe.

While stressing that such a scenario is possible but not probable, American Express’ Anderson said: “It would be the first worldwide economic contraction we’ve had since the Great Depression . . . . That’s the kind of scenario that scares the hell out of me.”

Aside from the immediate threat to the U.S. economy and stock market, some experts say the problems in Russia and Latin America present a less discernible but more serious long-term threat.

The severe financial pain being inflicted on developing nations and their citizens may cause them to rethink the inchoate wave of capitalism that has taken hold in their nations in recent years.

Though democracy and free-market thinking have made strides in countries such as Russia, some experts fear that hard-liners could use the currency problems to turn the tide back toward totalitarianism.

In Russia, for example, the country’s virtual financial collapse has stirred members of Parliament to call for the resignation of the prime minister and to challenge President Boris N. Yeltsin’s economic policies.

“This is probably an inflection point in the post-Cold War period,” said Richard Medley, head of Medley Global Advisors, a New York research firm. “Everywhere, you have developing country governments saying, ‘Maybe free markets aren’t all they’re cracked up to be,’ and who can blame them?”

In particular, the currency devaluations in Asia and Russia, and feared moves in Latin America, strike directly at the heart of the general population.

Despite significant sacrifices involved in the transition to free-market economies, one major benefit to foreign consumers has been newfound access to Western goods. With devaluations, however, the prices of those Western goods get out of reach for all but the wealthiest.

LATIN AMERICAN WOES: Latin American markets tumbled again as Brazil struggled to defend its currency. D1

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Another Wild Week

Most world stock markets plummeted on Friday, as currency-devaluation contagion worries spread to Latin America. But the Dow Jones industrial average battled back from a steep loss, and for the week the Dow ended higher--as did some Asian markets.

Russia: Stocks plunge 29% for week as ruble is devalued.

Germany: Main stock index falls 5.2% for week as Russia’s woes hit Europe.

Venezuela: Stocks sink 22% for week, including 8.4% on Friday, on devaluation rumors.

Hong Kong: Main market index gains 4.2% for week as government buys stocks.

Japan: Nikkei stock index rises 1.2% for week as weak yen begins to strengthen.

U.S.: Dow index rises 1.3% for week amid wild swings. Bond yields hit record lows.

Source: Bloomberg News