Dow Suffers Worst-Ever Point Drop of 616; Nasdaq Falls 355
Wall Street suffered its worst collapse Friday since the 1987 market crash, as panicked selling wiped out hundreds of billions of dollars of shareholder wealth and raised the risk of real harm to the broader economy.
The Nasdaq composite index plummeted 355.63 points, or 9.7%, to 3,321.15, and the Dow industrials slid 616.23 points, or 5.6% to 10,307.32. For the week--by far its worst ever--the Nasdaq lost a stunning 1,125 points, or 25%.
This slump could cause more lasting damage than did the crash of 1987, analysts said, because many more Americans own stock today--an estimated four or five out of 10, as compared with two out of 10 in 1987.
“This isn’t Monopoly money,” said Michael Clark, chief of equity trading at CS First Boston. “If you doubled your money last year it was still your money, and you’re not going to feel good if you gave away half today.”
Nobody knows remotely how much borrowed money has poured into the stock market in recent years. Much of Friday’s selling was forced upon investors who had borrowed money directly from brokerages, and analysts said that kind of pressure would likely continue next week.
Many such investors will face “margin calls”--demands for cash--because their collateral evaporated in Friday’s trading. For online investors, the margin calls will come by e-mail tonight and over the weekend.
After weeks of eroding investor confidence caused by sliding technology stocks, the trigger was pulled on Friday after the government reported a much higher-than-expected rise in consumer prices in March.
Investors, already antagonized by a Federal Reserve bent on tightening credit, feared that the inflation data could mean even larger rate hikes ahead.
“What started the bull market in 1982 was a sign that inflation was finally under control,” said Arthur Micheletti, chief investment strategist at Bailard Biehl & Kaiser in San Mateo. “If this is more than just a cyclical blip up, one of the major legs propping up the market--low inflation--could be knocked out.”
Inflation has risen periodically since 1982, certainly by as much as was reported Friday, and then returned to the overall trend downward.
The selling began early in the day and only let up for an hour or so at midday. The Dow’s loss was its worst-ever point decline, eclipsing the 508-point drop on Oct. 19, 1987.
The Nasdaq’s percentage loss was its second-worst ever. Losers swamped winners by 8 to 1 on Nasdaq and more than 6 to 1 on the NYSE. All 30 Dow industrials lost ground Friday, and only 13 of the S&P; 500 stocks--America’s biggest companies--posted gains.
“It was just an absolute buyers boycott,” said Charles Pradilla, chief investment strategist at S.G. Cowen.
Old-economy stocks got hammered along with technology shares, although the most staggering losses were in the sectors, such as Internet, wireless and biotechnology, that posted the most eye-popping gains last year.
Analysts said widely held stocks like General Electric, IBM and Wal-Mart Stores were victimized partly because, even in a panic sell-off, you can always find buyers for those names. Mutual-fund managers forced to raise cash for redemptions can sell IBM at a relatively reasonable price while the bottom drops out of smaller, “hotter” stocks.
Still, some Wall Streeters were hoping that buyers would be lured back next week by the prospect of snapping up blue-chip stocks at distressed prices.
Influential strategist Abby Joseph Cohen of Goldman Sachs said in an interview on CNBC Friday evening that the U.S. economic expansion is “far from over” and that “we think that there’s a higher price appreciation likely from current levels.”
But a note of caution from Cohen two weeks ago was one of the factors cited in creating Wall Street’s turbulence.
Nothing from Friday’s market action held out much hope that more downward pressure on stocks would not continue. Analysts pointed out that in previous sell-offs recently, investors have stayed in the market, jumping from one sector to another. This time, they are pulling out cash and moving to the sidelines.
Friday’s trading volume did not reach record levels in either market--a fact that may make things worse on Monday, if fence-sitting investors go home for the weekend and come back next week opting to exit the market.
Despite strong corporate earnings and a still-healthy economy, the market now faces the payback for extraordinary levels of speculation that took Nasdaq to record heights by early March, and stock price-to-earnings ratios to unheard-of levels.
Where that payback ends, no one can be sure. What’s more, unlike during the 1990 bear market and the 1998 Russia-induced plunge, the Federal Reserve is not there today to help.
Some critics, like economist Henry T.C. Hu at the University of Texas Law School, say the Fed helped to inflate the stock-market bubble by convincing investors that it would bail them out of any emergency.
Now is Fed Chairman Alan Greenspan’s chance to right that wrong by ignoring the sell-off and “making it absolutely clear to people that there is such a thing as risk,” Hu said Friday.
One Wall Street veteran who could say “I told you so” is Michael Metz, chief equity strategist for CIBC Oppenheimer. Although Metz would not confirm it, sources in the firm say he has been all but muzzled in recent years because his warnings about overvaluation clashed with more bullish voices.
“Today there are tens of millions of households buying stocks they don’t understand just because the market is going up,” Metz said Friday.
But what worries him most is that the true amount of leverage--stocks purchased on credit--may be far higher than can be seen from simply the record levels of margin loans by brokerages.
Metz noted that 18% of 401(k) retirement accounts have loans outstanding against them. Home-equity loans and mortgages with 0% down payments also provide vast borrowing power, not to mention credit cards. How much of this ready cash has gone into the stock market?
“That’s the trillion-dollar question,” Metz said.
With enough leverage, a stock-market crash could be as bruising to the economy as a real-estate collapse.
Even if they didn’t buy on credit, many investors with shrinking stock portfolios may cut their spending on cars, vacations, home improvements and the like in a reversal of what economists call the “wealth effect.”
In fact, the Fed may be counting on such a chill in consumer spending to help it slow down the economy.
If Wall Streeters could find any good news in Friday’s havoc, it was that the market damage might keep the Fed from raising interest rates by more than a quarter of a percentage point at its May 16 meeting. Until this week, many Fed watchers were expecting a half-point rate hike.
Stock options have been a popular way for companies to pay their employees, but a prolonged bear market could push workers to demand old-fashioned cash, putting upward pressure on wages.
“You’ve got the UPS millionaires who’ve been very happy to drive those brown trucks and carry packages because they got rich” in United Parcel Service’s initial public stock offering last year, said Christopher Low, chief economist at First Tennessee Capital Markets.
“How do you keep them happy if the stock falls?” he asked.
Another way the market plunge could ripple into the “real” economy is by starving young companies of the cash they need to grow, driving some out of business. Investors who got burned by hot Internet or biotech stock offerings may be slow to help finance the next big idea.
“Ordinary people have been taking venture-capital-like risk for a long time,” said Clark of CS First Boston. “It’s now dawning on them that if you want the 30% and 50% returns venture capitalists get, you have to embrace the risk of getting wiped out.”
When the final bell sounded on the Big Board on Friday, traders poured out of the Exchange into the glare of massed cameras and television lights. Tourists and workers heading home paused to watch the interviews.
Exhaustion was etched in many of the brokers’ faces as they trailed a steady stream of “No comments” until one man broke ranks.
“It was a helluva day,” he said, declining to give his name as he hurried away.
Just down the block, Keith Simon, 38, a bond trader, peered in the street-level window of a discount brokerage.
“I think the market just went too fast, too quickly,” said Simon. “Look, the U.S. economy still is in very good shape. . . . I think what this does is hopefully take some of the speculative money out of the market and it keeps the real investor in there.”
Nearby, Pat McHugh, a law firm office manager, puffed on a cigarette. Unlike many of the traders, he didn’t look worried.
“I think the market has been overpriced for the last couple of years,” McHugh said. “Fortunately, last week I got out of half of it--almost everything, techs, cyclicals. I think it’s going lower. . . . I can see another thousand points going down.”
Scott Black, president of Delphi Management in Boston, is regarded as one of the most disciplined of “value” investors, disdaining any stock priced at more than 13 times the company’s per-share earnings. Even after this week, the average price-to-earnings ratio for S&P; 500 stocks is 27.
Black counseled investors not to leap at what look like bargains in a market that has yet to stabilize.
“It’s better to be two days late than three weeks early,” he said.
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Times staff writer John G. Goldman contributed to this story.
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Black Friday for Stocks
Investors panicked Friday after the government released a surprisingly bad inflation report. The technology-heavy Nasdaq suffered its second-biggest one-day percentage decline.
Source: Associated Press
