Wall Street Winds Up Its Worst Week This Decade
Panic gave way to exhaustion on global markets Friday as investors continued selling stocks but without the intensity seen in Thursday’s worldwide plunge.
It wasn’t a “Black Friday,” but some traders said that had as much to do with fatigue as anything else.
“We’ve had a long month this week,” said Arthur Hogan, chief market analyst for Jefferies & Co. in Boston. “People just wanted to blow the whistle and go home.”
On Wall Street, bank, brokerage and technology shares led the market lower, completing the worst week for stocks in this decade.
The Dow Jones industrial average dropped 114 points, or 1.4%, Friday, to 8,051, just 143 points above where it started the year. The Nasdaq composite index, dominated by big-name technology stocks, fell 2.8%.
For the week, the Dow industrials dropped 5.7%, the worst weekly performance since the “mini-crash” of October 1989. The average is down 14% from its July 17 record, its biggest drop since the bull market began in 1990.
Trading volume on the New York Stock Exchange on Friday was a heavy 841 million shares, but that was down from 939 million shares Thursday.
Amid some relative good news--Russian President Boris N. Yeltsin’s decision to stay in power and Federal Reserve Chairman Alan Greenspan’s decision to join Treasury Secretary Robert E. Rubin and Japanese Finance Minister Kiichi Miyazawa in a meeting next Friday--many investors still opted to take money out of the market ahead of the weekend.
“We’ve gone from an environment where people are accustomed to a 30% return to one where they just want their money back,” said Michael Clark, head of equity trading at CS First Boston.
Thursday’s debacle, which included a 357-point plunge in the Dow and worse damage in European and Latin American markets, was set off by the collapse of the Russian ruble and rumors that Yeltsin might be out, plus Japan’s continuing inability to find a way out of its financial crisis.
Indeed, as critical as nuclear-armed Russia’s stability is to the world scene, Japan poses a more immediate and serious threat to the global economy, said Carl B. Weinberg, chief economist for High Frequency Economics in Valhalla, N.Y.
As the Nikkei withers, it further weakens Japanese banks, which invest in stocks directly and accept them as collateral on loans.
The collapse of one or more major banks could spark panic and send investors running for cash, Weinberg said. And where would they get it? Since 1984, the Japanese have invested $2 trillion in markets worldwide--and that’s counting only stocks and bonds, not real estate.
A massive cash call from Japan would batter markets globally, Weinberg said.
Skirting the Rules Much More Difficult
When the Nikkei falls below 14,000, as it did Friday, Japanese banks face particular difficulty since the value of the shares they own in a host of other companies is no longer sufficient to meet international banking standards.
There are ways for Japanese banks to dodge these rules, but a Moody’s Investor Service downgrade of Fuji Bank’s deposit rating Friday only worsened the climate.
As if to further underscore the shakiness of the banks’ stock holdings, Commerz Securities (Japan) said Friday that stock holdings at 16 of Japan’s 19 top banks are now worth $17.4 billion less than what they paid for them. If the Nikkei slips to 13,000, only Tokyo-Mitsubishi--the world’s largest bank--would still have a profit, while none would if it falls below 12,000.
There were other worries for investors to bring home this weekend:
* Commodity prices continued to sag Friday, with the Commodity Research Bureau’s index hitting a 21-year low.
The collapse in prices for oil, grains, metals, cotton, pork, lumber and other basic goods is a strong signal of a global recession, said Edward Yardeni, chief economist for Deutsche Bank in New York.
Gold fell to a 19-year low of $273.40 an ounce on fears that Russia would sell from its massive reserves in an effort to stabilize the ruble.
Analysts said the threat of deflation could push governments around the world to relax fiscal and monetary policy quickly to spur economic growth.
Yardeni said the Federal Reserve, which has been focusing on the strength of the U.S. economy, ought to cut interest rates in reaction to the weakness elsewhere.
* U.S. consumer spending--the main engine of the economy--dropped in July for the first time in more than two years.
The downturn was blamed largely on falling auto sales because of the General Motors strike, but there are worries that a worse drop in the stock market could hurt consumer confidence and lead to a further spending pullback.
The University of Michigan’s consumer-sentiment index showed a drop to 104.4 in August from 105.5 in July. Analysts said a further dip is likely if stocks keep losing ground.
“It’s no longer a question of what the economy does to the market, it’s what the market does to the economy,” said CS First Boston’s Clark. “If it goes down more, housing starts, consumer spending--those things would turn on a dime.”
* In Hong Kong, the government conceded the former British colony is deep in recession but declared a victory in its two-week battle to fend off speculators and stabilize the financial markets.
On the stock market, Friday was a crucial day in the government’s fight against speculators as August futures contracts expired. Those betting on lower prices in August paid dearly as the market closed at a level higher than they had expected.
Analysts said the government will have a hard time unloading the massive amount of stock it holds without triggering a market collapse.
“The government just won the August battle but what happens in September?” asked George Chan, research manager at Celestial Asia Securities Ltd.
“If throwing money in the market is all the government can do, victory will finally go to the speculators,” the Hong Kong Standard said in an editorial.
The selling on Wall Street was concentrated in some of the biggest, most liquid stocks--Coca-Cola, Wal-Mart, Dell Computer, Microsoft--which suggested some mutual-fund managers were raising cash.
For the week, the Standard & Poor’s 500-stock index lost 4.8% and the Nasdaq composite index dropped 8.6%.
The damage, as usual in recent months, was worse in small stocks. The Russell 2000 index of small stocks fell 7.55, or 2.0%, Friday to 358.55, and for the week it dropped 9.4%--its worst weekly loss since the Crash of 1987.
In foreign markets, the scene was mixed, with heavy losses overnight in Asia (including the lowest close since 1986 for Japan’s Nikkei index), restrained selling in Europe, and rallies in Latin America.
Mexico’s stock market was the day’s top performer, with the Bolsa index rising 3.2% as investors decided that stocks were cheap. Brazil’s Bovespa index gained nearly 2%.
U.S. mutual-fund companies said they received an extraordinarily high volume of phone calls from customers Friday, but many callers were simply checking on their Thursday losses rather than switching money out of stock funds.
“We saw an equal split of money flowing from money-market funds into equity funds, and from equity funds into money markets,” a spokesman for Vanguard Group said.
As the markets opened on Friday, twice as many investors logged onto Charles Schwab & Co.’s Web site--mostly to look up stock quotes or to check on their portfolios--as did on the day following last October’s 554-point drop in the Dow, said spokesman Greg Gable.
Phone calls to Strong Funds also spiked up. Early in the day, there were twice as many calls as anticipated. Overall, Strong’s call volume has been 20% to 30% higher than normal this month, a spokesman said.
The Kemper funds saw a 20% increase in calls on Friday, but most were inquiries, not requests for transactions, said spokeswoman Pamela Plehn.
Pullback Seen by Small Savers
Still, there is evidence that small savers are pulling back.
Nationally, about $45.4 billion went into money-market funds in the first four weeks of August, which is about 2 1/2 times this year’s monthly average, according to IBC Financial Data Inc. of Ashland, Mass.
At Schwab, a net $111 million flowed out of equity funds on Thursday, bringing net redemption totals for August to nearly $2 billion. The last time Schwab saw a month of net outflows from stock funds was June 1996.
The Strong Funds, like many other fund families, reported that its equity funds were experiencing slight net redemptions so far this month.
Times staff writers Paul Lim and Tom Petruno in Los Angeles contributed to this story.
Keep track of the latest changes in the markets each business day on The Times’ Web site. Go to:
https://www.latimes.com/quote
* WEARYING WALL STREET: Some blue chips suffered heavy losses at week’s end. D1
* ASIAN LEADER IN RECESSION: Hong Kong’s economic miracle suffers a rare setback. D1
* DID HEDGE FUNDS DO IT?: The Nikkei plunges, but the yen hits a one-month high. D1
