Dow Drops 210 on Fears of Economic Slowdown
Growing fears that the U.S. economy could be headed for a sharp slowdown or even outright recession in 1999 helped send the stock market reeling Thursday for a second day.
With more Wall Street analysts raising concerns that global financial crises may finally overwhelm the domestic economy, the Dow Jones industrial average plunged 210.09 points, or 2.7%, to 7,632.53, following a 237-point slump Wednesday.
After rebounding somewhat in September, the Dow now stands less than 100 points above its close on Aug. 31, when it dove 512 points in a “mini-crash” that marked the end of the market’s August sell-off--the worst decline since 1990.
On Thursday, investors reacted to major declines overnight in European markets and to a 12-year low reached in the Tokyo stock market by dumping U.S. shares and buying Treasury bonds, sending long-term bond yields to record lows.
Analysts said investors worldwide increasingly fear that the Federal Reserve Board may have acted too timidly and too late Tuesday when it voted to cut its key short-term interest rate by a quarter of a percentage point to 5.25%.
The move, aimed at easing a developing credit crunch in the U.S. economy, signaled that the Fed is prepared to make more money available to the banking system at a time when many banks and brokerages are experiencing sharp losses on certain loans and investments worldwide.
But many investors had hoped for a half-point cut, to send a message that the central bank is serious about bolstering the U.S. economy amid deepening gloom overseas.
On Wednesday, the International Monetary Fund urged the world’s central banks to cut interest rates to head off a global economic decline.
Now, if the Fed’s action fails to energize Wall Street, the slumping stock market could continue to weigh on already weakening consumer confidence and curtail consumer spending, experts warn.
That, in turn, would depress the U.S. economy at a time when it and the Western European economy are the only things standing in the way of global recession, given dismal prospects in battered Asia, Russia and Latin America.
The IMF now expects the U.S. to grow just 2% next year, down from 3.5% this year.
To be sure, there are those who think the stock market is overreacting. They point to continuing signs of strength in U.S. employment growth and other indicators.
Still, experts note that the stock market often is a harbinger of economic trends.
“We know the market doesn’t always get it right, but it’s definitely predicting a recession/deflation environment,” said Jerry H. Dombcik, research chief at McDonald & Co. in Cleveland.
Thursday’s sell-off hit technology stocks hard. The Nasdaq composite index dropped 4.8%, with computer networker Cisco Systems’ shares plummeting 7%, Dell Computer dropping 6% and Microsoft losing 5% on the day.
Among other industries sensitive to the economy’s swings, financial services and transportation stocks also fared badly, with the Dow Jones transportation index hitting a new low for the year. Historically, transportation stocks often lead the broader market.
The action on Wall Street followed a dismal trading day in Europe, where Germany’s DAX index dropped 5.5%. European investors seemed glum about both the Fed’s modest interest rate cut and signs that the economic crisis in Japan is not improving.
A quarterly survey conducted by the Bank of Japan indicated that a large majority of Japanese executives are pessimistic about the outlook for their firms. In the Japanese stock market, the Nikkei-225 index nearly fell through the 13,000 mark--a level not seen since 1986.
“You know the old saying that the markets run on fear and greed?” said Alfred Marshall, bond strategist at Interstate/Johnson Lane in Charlotte, N.C. “Well, fear’s in the saddle now.”
On Wall Street, analysts blamed much of the investor malaise on a worsening outlook for U.S. corporate profits amid the global economy’s slowdown. Blue-chip companies’ profits in the third quarter, in aggregate, are expected to fall 2.6%--the first quarterly decline since 1991.
There also are more abstract fears afoot in the market.
The mysterious world of hedge funds intruded shockingly last week, when federal regulators and giant banks and brokerages scrambled to rescue Long-Term Capital Management, a Greenwich, Conn.-based fund that until then had plied its high-risk international trading schemes in utter obscurity.
Wall Street worried that other hedge funds could blow up, causing untold damage to the banks and brokerages that lend them money.
Some hedge funds borrow so heavily to finance their trades that the potential losses from their bad bets can be more than 20 times as much as their equity capital. That is why the president of the Federal Reserve Bank of New York felt the need to intervene in the case of Long-Term Capital, even though the fund’s capital amounted to only a few billion dollars.
Rumors were rife on Wall Street on Thursday that some banks and brokerages would begin pulling back on their loans to other hedge funds. By trying to protect themselves, banks could actually trigger the kind of economic debacle the Fed is trying to avoid.
“It’s entirely rational of the banks to reassess their exposure to hedge funds,” New York-based economist Ian Shepherdson said. “But the last thing you want to do is precipitate a collapse” of credit and markets.
A related concern, reflected in a Fed survey of banks reported Thursday, is that banks facing possible hedge fund losses are becoming skittish about lending to other customers, causing a credit crunch that could hurt business expansion and harm the economy.
Yet, ordinary investors looking at the same set of circumstances are making similar judgments. Many think stocks are too risky and are rushing to buy Treasury securities instead.
“Prudent people are raising cash and won’t commit any more capital to the stock market until they get a better fix on where the global situation and corporate earnings are headed,” said Michael Clark, chief of equity trading at Credit Suisse First Boston Corp.
The yield on the benchmark 30-year Treasury bond fell to a record low of 4.88% on Thursday from 4.97% the day before. As recently as a year ago, yields below 5% seemed unthinkable.
At some point, Wall Streeters say, bond yields will get so low that stocks will again look attractive.
Barry Berman, managing director of equity trading at Robert W. Baird & Co. in Milwaukee, said the stock market is “retesting” the low point it hit Aug. 31, when the Dow briefly sank to 7,400.
Berman said he would be surprised to see stocks drop below that level, but said it is a possibility if the news continues to be negative.
“If every time you get up in the morning there hasn’t been any progress overseas, if third-quarter earnings turn out worse than expected, if some other derivative risk is exposed that we haven’t expected, it could happen,” he said.
* CORPORATE WOES: Aggregate profits are expected to fall for first time since ’91. D1
* GLOBAL REFORMS: Treasury secretary calls for efforts to prevent crises. D1
