Wall Street Staggers as Clinton Woes Add to Fears
With President Clinton’s potential legal problems adding political uncertainty to an already troubled climate on Wall Street, U.S. financial markets Tuesday showed signs of cracking under the strain.
The Dow Jones industrial average fell as much as 212 points before recovering to end the day down 93.46 points, or 1%, at 8,934.78.
Broader market indicators fell further and failed to rally back. The Nasdaq composite index slumped 36.73 points, or 1.9%, to 1,896.53.
Tuesday’s market tumble, in heavy trading, was the fifth decline in seven sessions, the biggest of which was Thursday’s 195.93-point Dow plunge.
Worries about weak corporate earnings and the financial crisis in Asia were once again the main culprits in Tuesday’s drop, analysts said. But the latest twist in the White House intern scandal--as former intern Monica Lewinsky agreed to testify to a grand jury about her relationship with Clinton--added to the negative tone.
The Lewinsky mess “injects gloom into an already gloomy picture,” said Hugh A. Johnson Jr. of First Albany Securities, because it threatens to undermine Clinton’s leadership at a time when economic and political crises in Japan, Southeast Asia and Russia are weighing on global markets.
“Given the problems in the rest of the world, can the global economy afford to be without forceful leadership from its most powerful economy?” asked John Lonski, an economist for Moody’s Investors Service.
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Meanwhile, Treasury bond yields rose and the dollar fell, which some observers took as signs that overseas investors might be worried enough about Clinton’s legal troubles to start pulling back their money.
The 30-year Treasury bond yield rose to 5.73% from 5.71% on Monday. The dollar fell 1.06 yen to 141.35 yen.
When the stock market has tumbled this year, the bond market has often benefited from a “flight to quality” and to safe haven. But Clinton’s woes could cause more foreign investors to shy away from U.S. assets in general, some analysts worry.
However, the dollar also might have weakened Tuesday on optimism that Japan’s new political leadership might enact financial reforms that could help pull the country out of the economic doldrums, bolstering the yen.
On Wall Street, a number of respected seers, including Barton M. Biggs, chief global strategist of Morgan Stanley, Dean Witter, Discover & Co., are now pronouncing the seven-year bull market dead.
Biggs told clients during the weekend that a “serious cyclical bear market” might have begun, with the U.S. stock market vulnerable to a decline of as much as 30% from its highs.
The Dow already is down 403 points, or 4.3%, from its record close of 9,337.97 on July 17. A 30% decline from that peak would peel off another 2,400 points, dragging the Dow to a level not seen since November 1996.
More important, such a slump could kick loose a key economic support beam.
“The stock market has been a real important source of stimulus for the consumer and the domestic economy,” said Jim Glassman, senior U.S. economist for Chase Securities in New York.
Since the market close on July 20--six trading days ago--the Nasdaq index is down 5.8% and the Standard & Poor’s 500-stock index is off 4.6%.
So far, however, individual investors have shown no signs of panic. Big institutional investors and program traders have accounted for most of the sharp swings in the market in recent sessions, analysts said.
Many individuals continue to use market dips as buying opportunities--a strategy that has rewarded them abundantly during this historic bull market.
“Small investors have not lost their courage,” First Albany’s Johnson said.
Nor have many market pros who see this latest market tumble as merely a short-term “correction.” Bullish analysts note that the market has three times in the last 15 months rebounded sharply from abrupt declines. They also note that Biggs inaccurately predicted a bear market last October.
Still, although the Dow recovered more than 100 points in the last 90 minutes of trading Tuesday, traders said the rally was unconvincing--as was the Dow’s 90-point gain Monday--because the broader market failed to follow.
On the New York Stock Exchange, declining stocks outnumbered gainers 2,182 to 845 on Tuesday, continuing a downward trend that began in early May but has been largely masked by the gains in major blue-chip stocks.
The Russell 2,000 index of small-company stocks sank 1.3% Tuesday to its lowest point since January.
What’s more, both the Russell index and the Nasdaq composite closed near their session lows, failing to bounce back like the blue-chip Dow.
Two factors that helped the Dow rebound were the anticipated settlement of the General Motors strike, finally announced after the market close, and a $5-billion stock buyback and 20% dividend hike that drug maker Merck announced late in the trading day.
GM rose $1.13 to close at $74.25; Merck eased 56 cents to $124.50 after trading as low as $120.81.
Hanging over the market overall in recent sessions has been a sense that stock valuations can no longer be supported by corporate earnings growth, which for blue-chip companies this year has slowed to the weakest pace since 1991.
The pressure on profits has stemmed from a slowdown in U.S. exports to Asia, rising U.S. wages and cutthroat price competition in many industries, among other factors, analysts say.
Some Wall Streeters have been in denial about the weak earnings, but it is getting harder to ignore the evidence, Johnson said.
Second-quarter earnings growth for the S&P; 500 is likely to be up only 1.5% over the corresponding period last year, he said, and the picture looks worse later this year.
“We’re having a very close brush with a profit recession,” Johnson said, “and there’s never been a profit recession without a bear market. Never.”
In such an atmosphere, Lewinsky makes a “convenient excuse” for traders to bail out, said Gary Anderson of Anderson & Loe, an institutional money management firm in Eugene, Ore. “Any news is good news when the market’s going up, and any news is bad news when it’s going down.”
Despite Tuesday’s carnage, IDG Books, publisher of the “For Dummies” guides, went public. The stock, priced at $15.50 a share, rose to close at $16.42 on Nasdaq.
In foreign trading Tuesday, Latin American markets plunged with U.S. shares. The Mexican stock index dove 2.9% to 4,343.98.
Asian markets closed mixed Tuesday after tumbling Monday. Tokyo’s Nikkei-225 index rebounded 1.1% after diving 2.6% on Monday. But stocks fell again in Hong Kong, Singapore and China.
Market Roundup, D9
