Wall Street Nose-Dives, Then Rallies by Day’s End
In a day of spectacular whiplash on Wall Street, the stock market Tuesday took its most violent plunge in years amid panic selling, then rebounded in a stunning afternoon rally that erased most of the early losses.
The technology-heavy Nasdaq composite index, which tumbled 7.6% on Monday, plummeted an additional 13.6% in three hours of furious action Tuesday before the bounce back began.
By contrast, Nasdaq lost 11.4% during the Oct. 19, 1987, market crash, its worst full day decline ever.
Though investors initially snapped up blue-chip shares Tuesday as they fled Nasdaq, the technology debacle soon spread to the rest of the market, as trading volume reached unprecedented levels: a record 2.88 billion shares on Nasdaq, and 1.5 billion shares on the New York Stock Exchange floor.
The Dow Jones industrial average, which had gained 200 points early Tuesday at Nasdaq’s expense, sank to a 504-point loss by midday before rallying back to close down 57.09 points at 11,164.84.
The Nasdaq index finished the day down only 74.79 points, or 1.8%.
That such a wild day could evoke relatively little of the shock investors felt in market dives such as in 1987 is a testament to the extraordinary volatility of technology stocks in recent years--and to their huge price gains just since October. The Nasdaq index still is up 51% since Oct. 1.
But many analysts said the swagger may have been slapped out of the market’s “new-economy” sector for now.
Investors, they said, will be slow to return to the most speculative parts of the market, such as smaller Internet and biotechnology stocks that had rocketed early this year on potential rather than actual sales and earnings.
“The guys making promises they can’t fulfill will go away now,” said Rao Chalasani, strategist at First Union Securities in Chicago.
Investor caution could slow the wave of stock offerings that have been launching new “dot-com” businesses and keeping slightly older ones afloat. A tighter financing climate would hasten the day when such firms must either start making money or shut their doors.
Another way the slide in technology stocks could affect the broader economy is by dampening consumer confidence enough to make people rein in spending.
For that reason, a prolonged stock market slump could restrain the Federal Reserve from raising interest rates further, some observers believe.
“The plunge today is serious enough that any thought of wealth driving the economy is going to be tempered at minimum, and unless there’s a reversal right away, the Fed is more inclined to be mild with their actions,” said Richard Rippe, chief economist at Prudential Securities.
Tuesday’s selling, which took recent favorite large and small tech stocks down sharply in the first few hours, was slow to develop. The Nasdaq market actually inched higher in the first few minutes.
But investors then began to dump technology shares in a nearly relentless cascade. Shortly after 10 a.m. PDT the Nasdaq composite hit 3,649--which represented a 28% loss from its record high close of 5,048.62 on March 10.
Thus, in the space of 3 1/2 weeks Nasdaq shifted from spectacular bull market (up 24% year-to-date as of March 10) to a genuine bear market, usually defined as a decline of at least 20% from peak prices.
The selling frenzy was sparked in part by “margin calls” hitting investors who had borrowed record sums in recent months to buy stocks--an extremely speculative strategy.
With Nasdaq down nearly 8% last week and down an additional 7.6% on Monday, lenders started demanding more cash of these borrowers, forcing many investors to sell stocks and close out their loans.
Charles Schwab Corp., operator of the largest online brokerage, said margin calls have been running at twice the normal level in recent days. A spokesman said traffic was heavy in Schwab offices Tuesday, “but they were not flooded” with customers.
At Schwab, margin accounts represent about 2.3% of portfolio assets. The ratio is thought to be far higher at other online brokerages, many of which do the bulk of their volume in tech stock trades.
Tuesday’s action was chaotic enough to prompt a top White House economic aide to issue a calming statement Tuesday afternoon. “We believe that the very fundamentals of our economy look still very, very strong,” Gene Sperling, the president’s chief economic advisor, told reporters, while declining to comment directly on the market gyrations.
Many analysts also were impressed with the ability of the Nasdaq Stock Market and the NYSE to process a new high in share volume. Richard Ketchum, president of the National Assn. of Securities Dealers, which operates the Nasdaq market, said that although the market suffered some “capacity-related delays,” he was “delighted with the way our systems performed under extraordinary circumstances.”
But many Wall Streeters expect more pain in the markets.
The tech sector has “a brick wall hanging over its head,” said Peter Canelo, chief investment strategist at Morgan Stanley Dean Witter.
“So many people on margin got blown away,” Canelo said. “You just don’t come back with the same enthusiasm.”
Even in this speeded-up environment, repairing the damage from a big sell-off takes time.
Technology companies are expected to start reporting strong first-quarter earnings in the days ahead, Canelo said, but many investors will use any strength in the market as an opportunity to sell.
“They’ll say, ‘I’m back to even--get me out,’ ” he said.
Still unknown is the impact of Monday and Tuesday’s wipeout on mutual fund investors, many of whom have been pouring money into tech funds this year. A record $54 billion flowed into stock funds--mostly aggressive-growth stock funds--in February alone.
Many of those investors now are under water. Indeed, despite the rebound Tuesday, Nasdaq still is off 18% from its peak reached March 10. Tech giants such as Motorola, Cisco Systems and CMGI have fallen anywhere from 15% to 45% from their recent peaks. Some smaller tech stocks have dropped 70% or more from their peaks.
If many investors decide to take their losses and flee, there could be a flood of fund redemptions that would drive the market lower in coming days. In fact, some analysts thought that “momentum” stock fund managers may have been a factor in Tuesday’s plunge, selling shares to raise cash in anticipation of redemptions.
Stanley Nabi, strategist at Wood Struthers & Winthrop, predicted that the Nasdaq index would sink again to the 3,600-to-3,700 range soon. After that, he said, market leadership may be taken over by some more traditional blue-chip stocks, such as drug stocks.
More optimistic was Edward P. Nicoski, technical strategist at U.S. Bancorp Piper Jaffray in Minneapolis, who said this week’s technology crash “really felt like a typical, old-fashioned selling climax.”
“This kind of panic, get-me-out activity occurs close to the end of a down sequence,” agreed Ralph Bloch, chief technical analyst at Raymond James Financial. “Bear markets don’t start this way--they end this way,” he said.
Whether the recovery period takes months or hours, many experts said the technology sell-off will be constructive in the long run because it will push investors to be more rational and less hyperbolic in their expectations for stock returns.
Nabi noted that many companies with consistent, 15% annual earnings growth have been spurned by investors who preferred to chase the hundredfold returns promised by Internet, wireless and biotech stocks.
“Who wanted 15% growth when you were being promised 100%, even infinite growth?” he said.
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Wall Street’s Stunning Swing
Nasdaq
The day’s low: 3,649
down: 574
Tuesday
close: 4,148.89
down: 74.79
Dow Jones
The day’s low: 10,717
down: 508
Tuesday
close: 11,164.84
down: 57.09
