Interest-rate warnings from Federal Reserve Chairman Alan Greenspan on Thursday added to an already nervous mood on Wall Street, where investors are taking profits and in some cases hunkering down for another midsummer swoon.
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.
On Wall Street, the Dow industrials eased 33.56 points to 10,969.22, but the broad market fared worse. The Nasdaq composite index slumped 2.8% in the second major sell-off this week.
Greenspan, in testimony before Congress, didn't veer far from his previously stated concerns about a hot U.S. economy possibly rekindling inflation.
Nonetheless, the bond market had its worst day in a month, as investors reacted to Greenspan's statement that the Fed would be "especially alert to inflation concerns" in judging whether to lift interest rates again.
The yield on the benchmark 30-year Treasury bond climbed to a two-week high of 5.96% from 5.90% on Wednesday.
In the stock market, recently red-hot technology shares again led the decline, dragging the Nasdaq composite down 77.33 points to 2,684.44. Microsoft fell $3.63 to $91.06, IBM slid $5.13 to $123.88 and Amazon.com dived $18.25 to $107.19.
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 New York Stock Exchange on moderate trading volume of 785.47 million shares.
Some analysts are calling for a sharp pullback in stocks, arguing that any new rise in interest 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 central bank had been committed to supporting stocks since the start of the Asian financial crisis in 1997, it has now withdrawn that commitment, she said.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.
But Charles Pradilla, chief strategist at S.G. Cowen, said another concern that will weigh on markets through year-end is the year 2000 computer problem. Nobody knows how much trouble the Y2K bug will cause, but that's the point, Pradilla said: Investors hate uncertainty.
Meanwhile, other stock markets that had been surging in recent months--especially those in Asia--also have hit the skids.
Singapore's market fell 1.4% on Thursday and Hong Kong's fell 0.4%, as Japanese stocks plunged.
Japan's market is being hammered by the yen's surprising strength. Belief in Japan's economic recovery is boosting demand for yen, driving the currency to 116.70 to the dollar on Thursday, versus 118.10 on Wednesday and 122 just two weeks ago.
But a higher yen hurts Japan's export-driven economy, so the Bank of Japan has been trying to stop the rise--to no avail.
Similarly, fresh optimism about Europe's economy has driven the euro higher this week--and European stocks lower.
Market Roundup, C8; hot yen: Spotlight, C9
Fed will act quickly should inflation accelerate, chairman says. C3
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