Nasdaq Slide Tops 10%, Making It a ‘Correction’
The Nasdaq composite index officially fell into a correction Tuesday as investors continued to dump Internet and other richly priced technology stocks amid fear of rising interest rates.
The Nasdaq tumbled 72.76 points, or 3%, to 2,380.90, and is now down 10.2% from its April 26 record. A “correction” is widely defined as a drop in an index of 10% or more.
The Nasdaq is on the verge of its worst slump this year. It fell 10.4% in early February.
Broad weakness across a number of sectors also pushed the Dow Jones industrial average down 123.58 points, or 1.2%, to 10,531.09. The Standard & Poor’s 500 index fell 22.25 points, or 1.7%, to 1,284.40.
“The major issue is interest rates,” said Ned Riley, chief investment officer at BankBoston Corp. “Inflation and interest rates are basically anathema” to high-valuation stocks.
Intel, the world’s No. 1 computer chip maker, led the Nasdaq and S&P; 500 lower. Analysts said the company is selling more of its lower-priced Celeron processors than expected--and fewer of its higher-priced Pentium III products.
Intel slipped $3.06 to $52.88. The sell-off caused Intel shares to drop below a so-called support line--the point at which the stock has rebounded in the past.
In April, Intel said it expected second-quarter sales to be unchanged or slightly lower than the $7.1 billion reported in the first quarter. “The June quarter looks seasonally weaker,” said Greg Mischou, an analyst at Warburg Dillon Read.
Internet stocks were pounded for the second day in a row. Yahoo sank $10.94 to $126.94, Amazon.com slipped $5.94 to $111.56 and America Online gave back $4.50 to close at $115.
The weakness in the Internet sector was evident in the initial public offering of Barnesand-noble.com. The online bookseller owned by Barnes & Noble rose $4.94, or 27%, to $22.94 on its first day of trading. However, that was tepid compared with the blistering debuts of some recent Internet IPOs, such as EToys last week.
“With so much new supply hitting the market, it is possible that investor demand for Internet shares on the open market is much closer to being satisfied,” said Henry Blodget, an analyst at Merrill Lynch & Co.
The Bloomberg U.S. Internet index fell 7.5%, bringing its two-day decline to almost 15%. Priceline.com fell $21.34 to $104, EBay dropped $19.31 to $163.94 and Charles Schwab slid $9.75 to $96.63.
Twice as many stocks fell as rose on the New York Stock Exchange. McKesson HBOC was the biggest decliner in the S&P; 500 in percentage terms, dropping $4.69, or 12.3%, to $33.50. The stock sank after the drug wholesaler said it found more faulty sales on the books of the software business it bought in January and will restate previously reported profit for the second time in a month.
While the Federal Reserve left interest rates unchanged at last week’s policy meeting, it warned that it would raise them if economic growth appeared to be spurring inflation. Higher rates tend to crimp profits, by making it more expensive for companies to borrow money and expand.
Investors are concerned that many stocks are overpriced given the outlook for rates. Companies in the Nasdaq 100 index trade at an average of 81 times estimated earnings per share for this year.
Volume slipped on the New York Stock Exchange, but rose on the Nasdaq.
The yield on the 30-year Treasury bond eased down to 5.74% from 5.76% a day earlier.
The Dow Jones utilities average advanced to a fifth straight record, rising 1.05 points to 328.48, as investors sought shares that offer relatively high dividends.
American Electric Power, which trades with a dividend yield of 5.5%, rose 63 cents to $43.69; Consolidated Edison, with a yield of 4.3%, gained 63 cents to $49.38; and Duke Energy, with a yield of 3.6%, gained 75 cents to $60.13.
“It’s mostly a defensive play, and there is also a sense that with deregulation they may offer some opportunities” for good value, said Bill Meehan, senior market analyst at Cantor Fitzgerald & Co., an institutional brokerage.
Georgia-Pacific fell $10 to $86 as the No. 2 U.S. maker of lumber and paper agreed to buy Unisource Worldwide for $1.2 billion in cash and assumed debt.
Mexican stocks closed lower on renewed investor nervousness about Latin America, a weak peso and an afternoon slump in the Dow.
Mexico’s key IPC index closed down 57.73 points, or 1.1%, at 5,441.06. At the end of 1998, the IPC stood at 3,959.66.
Rumors that Argentina would abandon its one-to-one currency peg with the U.S. dollar have spooked investors despite repeated denials by Argentine financial officials, traders say.
Mexican banking leader Banamex quoted the peso closing at 9.62 to the dollar, weaker from its open of 9.54 and sharply off of its Friday close of 9.41.
Some traders who follow U.S. pricing patterns said the worst may be over for the Dow industrials, the S&P; 500 and the Nasdaq composite, according to an analysis of so-called trading envelopes.
Trading envelopes are calculated from the assumption that a stock or index fluctuates by a fixed percentage from its moving average. Some analysts assume prices attract investors at the lower band and have trouble gaining at the upper band.
Market Roundup, C11
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Nasdaq Damage
The technology-heavy Nasdaq composite index’s current 10.2% correction nearly matched February’s 10.4% slump. Weekly closes and latest:
Tuesday: 2,380.90
Source: Bloomberg News
