Dow Average Drops 512 Points; High-Tech Stocks Hit Hard

By JAMES F. PELTZ

Sept. 1, 1998 12 AM PT

TIMES STAFF WRITER

The stock market’s summer swoon turned into a dramatic rout Monday as the Dow Jones industrial average plunged more than 500 points, its second-worst point drop in history. Stocks now teeter on the edge of their first bear market since 1990.

The financial blood bath was even worse in the market’s glamorous high-technology arena, where some of the biggest names in computer, software and telecommunications stocks--such as Microsoft and Dell Computer--were hit with waves of selling.

“They really hit the market leaders hard,” said Peter Anderson, chief investment strategist at American Express Financial Advisors. “They just pulverized them.”

That rattled many other investors because those stocks were the last pillar of strength in a market that’s already been dragged sharply lower in recent weeks by the economic woes in Asia, Russia and elsewhere around the globe.

During that span, more than $2 trillion of U.S. stock market wealth has vanished.

The blue-chip Dow on Monday sank 512.61 points to 7,539.07, a point loss second only to its 554.26-point drubbing last Oct. 27.

But as only the 25th-worst percentage decline in the Dow, Monday’s tumble wasn’t a crash. Because the market has been so high--it seems hard to believe, but stocks set historic highs only six weeks ago--the 6.4% loss Monday fell well short of crash proportions. The “Black Monday” debacle of Oct. 19, 1987, for instance, amounted to a 22.6% plunge.

Trading volume on the New York Stock Exchange reached 918 million shares, third-heaviest ever.

The U.S. plunge helped drag markets lower in Latin America, where the Mexican market dove 5.1%. At midday today in Asia, most of that region’s markets also were lower, but modestly so--a hopeful sign, some experts said.

What happens to U.S. stocks next likely will depend less on Wall Street’s movers and shakers than on millions of individual investors and their response to the market’s wrenching pullback--something many of them have never witnessed, analysts noted.

The market’s direction could ride on whether Main Street keeps buying stocks and mutual funds during this drop, as it has during recent pullbacks, or starts selling in a big way.

The Dow--which has skidded 1,060 points in just the last four trading days, to the lowest level since Nov. 13--and other key indexes have now surrendered all the gains they had recorded this year and then some. The Dow is off 4.7% year-to-date.

Thus, many investors--either through their personal holdings or their retirement plans, such as 401(k) accounts--are losing money in stocks in 1998, a setback they haven’t encountered in years.

Moreover, Monday’s decline pushed the market to within a whisker of what many experts consider an official bear market--a drop of 20% or more from peak levels--for the first time since the Gulf War market of 1990. The Dow is off 19.3% from its record high of 9,337.97 on July 17.

The falloff since mid-July has been fueled by worrisome events overseas, including deep recessions across Asia and the Russian economic and political crisis. Some analysts said Monday’s drop was sparked by Russian lawmakers’ blockage of the formation of a new government.

But others said the heavy selling of Dell Computer and other big-name tech stocks was the key.

“These first-tier stocks had led the market’s rise, and now they’re being hit by nervous investors despite the fact that the fundamentals of these companies are still strong,” said Alan Skrainka, chief market strategist at the investment firm Edward D. Jones & Co. in St. Louis. “It was another crack in the dike.”

Treasury Secretary Robert E. Rubin, seeking to calm an increasingly nervous marketplace, said he had spoken with President Clinton, Federal Reserve Chairman Alan Greenspan and officials around the world.

Clinton was en route to a Moscow summit with Russian President Boris N. Yeltsin. Rubin and Greenspan will meet Friday with Japanese Finance Minister Kiichi Miyazawa about the lack of economic reform in Tokyo, which underlies much of the uncertainty rippling across the globe.

“The fundamentals of the United States economy are strong” and the “prospects for growth, low unemployment, low inflation continue to be strong,” Rubin said.

Then why are stocks sinking?

Share prices had surged in recent years on the shoulders of continued profit gains at U.S. corporations. That was especially true of fast-growing computer and technology stocks. They also were supported by good economic growth and low inflation.

But this summer, that outlook for higher profits dimmed because of the mounting problems in Japan, other Asian nations and, more recently, Russia.

In light of those problems, some investors viewed stock prices as having climbed too high--so they began taking profits. Small-company stocks went first, then the larger industrial companies and major banks, and finally the blue-chip technology stocks on Monday.

Hugh A. Johnson Jr., chief investment officer of First Albany Corp., said the bulk of Monday’s selling came from money managers like himself, who are under “intense pressure to perform.”

In recent years, professional stock-pickers often have failed to match the gains of such market indicators as the Standard & Poor’s 500-stock index.

“Since we couldn’t beat the market on the way up, we’ve assured our customers that we’ll beat the S&P; on the way down,” Johnson said. “We justify ourselves by preserving capital when the market declines--and the way you do that is sell stock and raise cash.”

But the huge question facing the market is: Will investors, especially individuals, maintain their practice of buying on market drops, or will they shift their cash elsewhere this time?

Since 1991, investors have viewed pullbacks as buying opportunities, pouring an unprecedented $1 trillion into stock mutual funds, confident that the market would soon rebound--which it usually did.

Now, “the real key to this market will be whether we see big net redemptions from mutual funds” this time around, said A. Gary Shilling, who heads his own investment firm in Springfield, N.J.

“The public has been trained by 15 years of a bull market to buy on the dips,” he said, “and people don’t know what bear markets are like.”

There has been a slight net outflow from stock funds in recent days, but nothing significant so far.

Harold Evensky, a Coral Gables, Fla., planner, said he expects another sell-off in the next few weeks.

But at the downtown Los Angeles office of the discount brokerage firm Charles Schwab & Co., branch manager John I. Yoshitake said investors “didn’t seem to be too alarmed about today’s events.”

“There’s been a pretty good increase in our foot traffic,” he said, referring to investors asking for advice, “but it hasn’t been overwhelming.”

Times staff writers Stuart Silverstein, Thomas S. Mulligan and Liz Pulliam and Times wire services contributed to this report.

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