Market Slumps Amid Greenspan’s Caution
U.S. stocks closed broadly lower for a second day Wednesday amid another barrage of disappointing corporate earnings and Federal Reserve Board Chairman Alan Greenspan’s warning that a market correction is inevitable--though he didn’t say when.
The Dow Jones industrial average ended down 61.28 points, or 0.7%, at 9,128.91 after partly recovering from a drop of as much as 115 points.
The Dow had slumped 105 points on Tuesday, its biggest loss since mid-June.
The Nasdaq composite index fell 9.39 points, or 0.5%, to 1,969.75 on Wednesday, after tumbling 1.7% on Tuesday.
Most major foreign markets also slid, while the dollar rose and bond yields edged higher.
While Wall Street’s key indexes ended with fairly minor declines on Wednesday, falling stocks outnumbered winners by nearly 2 to 1 on the New York Stock Exchange and by a 26-16 margin on Nasdaq.
Trading was very heavy, with nearly 740 million shares changing hands on the NYSE.
Greenspan, who disappointed markets Tuesday when he suggested in testimony on Capitol Hill that the Fed is still concerned about inflationary pressures in the economy, said little new on Wednesday as he concluded his two-day appearance.
But asked specifically by one congressman about the risk of a sharp decline in the stock market, Greenspan said: “I would say, ultimately, yes, I think that history tells us that there will be a correction of some significant dimension. What it doesn’t help you on very much is when; and indeed, history is strewn with periodic contractions of significant dimensions. And I have no doubt that--human nature being what it is--that it’s going to happen again and again and again.”
A correction usually means a drop of 10% to 15% in major stock indexes. A bear market is considered a drop of 20% of more. While some market indexes have suffered 10%-plus pullbacks on several occasions in the 1990s, the last official bear market was in 1990.
Greenspan’s comments, though hardly a revelation, reminded some Wall Streeters of how far the market has come this year, with the Dow still up 15.4% since Jan. 1 and the Nasdaq index up 25.4%. Most major indexes hit record highs last week.
Moreover, Greenspan also has warned investors in recent months about the slowdown in corporate earnings growth this year. He has stated that some analysts’ forecasts for a continuing boom in earnings growth over the next few years are most likely overly optimistic.
Weaker earnings coupled with soaring stock prices are a mismatch, Wall Street’s bears have warned--unless interest rates were to decline sharply, thus raising the relative value of stocks.
But on Tuesday, Greenspan appeared to dash any hopes that the Fed might lower interest rates soon, even as the economy slows.
And on Wednesday, disappointing earnings warnings from a host of big-name companies put added pressure on stock prices in general.
“It was a carry-over from yesterday, and it seems to be more influenced by earnings shortfalls than by further comments from Greenspan,” said Robert Stovall, head of Twenty-First Securities.
Greenspan wasn’t exactly dour. In fact, he noted that investors who bought on the market’s dips in the past have “turned out to be the ones who are prescient and wealthier.”
And he declined to say whether, at some point, a market decline might be large enough to scare a huge number of small investors into selling, rather than buying into the decline.
“It’s not clear exactly how they are going to behave,” Greenspan said. “So forecasting that they’re automatically going to start to sell, any more than the full professional managers of large pension funds would, I think any attempt to forecast that is probably futile.”
The bond market was largely unfazed by Greenspan’s comments. The yield on the bellwether 30-year Treasury bond inched up to 5.69% from 5.66% on Tuesday.
Meanwhile, the dollar continued to rise on doubts that the election of a new prime minister in Japan will prompt faster economic reforms. The dollar rose to 141.24 yen in New York from 140.35 Tuesday.
Among Wednesday’s highlights:
* Computer Associates led many tech stocks lower, tumbling $17.50 to $39.50. While the mainframe software maker reported a 25% increase in quarterly operating profit, it said many companies are deferring purchases to fix their year 2000 problems. It also warned that Asia’s economic slump will slow revenue growth in coming quarters.
Another tech loser: Hewlett-Packard, which slid $2.50 to $55.38 after projecting weaker results owing partly to a falloff in Asian demand.
* Apparel maker Liz Claiborne slumped $10.13 to $40.63 after saying it expects weaker earnings in the second half as department stores order less. Other apparel stocks also fell.
* Oakwood Homes fell $10.06 to $20.94 after the maker of manufactured homes surprised investors late Tuesday by taking charges to write down the value of securities.
* On the plus side, United Technologies, one of the 30 Dow industrials, rose $2.06 to $96.31 after it reported earnings of $1.44 a diluted share, 6 cents better than forecast.
And telecom equipment maker Qualcomm soared $9.56 to $67.13 on its strong earnings report.
Market Roundup, D8
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The Profit Slowdown
Fed Chairman Alan Greenspan this week cited slowing corporate earnings growth as a major problem for stocks’ bull market. Year-to-year percentage growth in operating earnings for the blue-chip Standard & Poor’s 500 companies, each quarter:
2nd quarter: 4.0%*
*Estimate
Source: Morgan Stanley Dean Witter
