Stocks and bonds both lost ground Thursday. And with the dollar tumbling to a five-month low against the Japanese yen--the opposite of what Japanese officials think is good for their struggling economy--Tokyo's Nikkei-225 share index fell nearly 3% to 17,730.
The Dow industrials eased 33.56 points to 10,969.22, but the broad market fared worse. The Nasdaq composite slumped 2.8% in the second major sell-off this week.
Greenspan, in testimony before Congress, didn't veer far from previously stated concerns about a hot U.S. economy possibly rekindling inflation. Nonetheless, the bond market had its worst day in a month, fearing higher Fed interest rates. The 30-year Treasury bond yield rose to a two-week high of 5.96% from 5.90% Wednesday.
Recently soaring tech shares again led the market decline, dragging Nasdaq down 77.33 points to 2,684.44. Microsoft fell $3.63 to $91.06, IBM slid $5.13 to $123.88 and Intel lost $1.69 to $63.88.
The Dow battled back from a drop of 122 points, but its rebound was far from infectious. Losing stocks outnumbered gainers by 18 to 11 on the Big Board.
Some analysts are calling for a sharp pullback in stocks, arguing that any new rise in rates will make historically high stock valuations seem even more out of line.
Christine Callies, chief investment officer at CS First Boston, for example, is forecasting a 15% near-term retreat from the market's highs reached last Friday. That would take the Dow down to about 9,500 and Nasdaq to 2,430.
So far, the Dow is down 2.1% from its peak last Friday of 11,209.84. The Nasdaq index has already fallen 6.3% from its peak.
Callies said she thought Greenspan was signaling a significant change in the Fed's attitude toward the stock market. Whereas the Fed had been committed to supporting stocks since Asia's financial crisis began in 1997, it has now withdrawn that commitment, she said.
The market has become "a fairly significant source of economic stimulus" as consumers spend some of their capital gains, Callies noted. Because Greenspan "would like the economy to slow, he would also like the stock market to slow," she said.
Ronald J. Hill, investment strategist at Brown Bros. Harriman & Co., expects a "typical bull-market correction" of 10% to 12%.
By coincidence, if last Friday was indeed the market's summer peak, it was exactly one year to the day of the summer 1998 peak--after which major stock indexes tumbled 20% to 30% in the next two months, amid Russia's currency devaluation and other global crises.
Hill doesn't expect the drop to be so steep this time because, with the global economy on the mend, corporate earnings are likely to be quite strong in the second half, particularly in comparison with the fairly weak profits of a year ago.
Meanwhile, other stock markets that had been surging in recent months--especially those in Asia--also have hit the skids.
Japan's market is being hit by the yen's strength. Belief in Japan's economic recovery is boosting demand for yen, driving the currency to 116.70 to the dollar on Thursday, versus 122 two weeks ago.
But a stronger yen hurts Japan's export-driven economy, so the Bank of Japan has been trying to stop the rise--to no avail.
Market Roundup, C8; hot yen: Spotlight, C9
* GREENSPAN REMARKS: Fed will act quickly should inflation accelerate, chairman says. C3
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Nasdaq composite stock index has slumped 6.3% from its record high reached last Friday. Weekly closes and latest:
July 16: 2,864.48
Source: Bloomberg News