Stocks Plunge as Fears of Recession Grow
Stocks plunged Wednesday in one of the heaviest trading days ever, as investors registered deepening fears about the economy’s course and the Federal Reserve’s willingness to right it.
The technology-dominated Nasdaq composite index plummeted 178.93 points, or 7.1%, to 2,332.78, its lowest level since March 1999.
The blue-chip Dow Jones industrials fell 265.44 points, or 2.5%, to 10,318.93. Most foreign stock markets also slumped.
Analysts said the Fed’s decision Tuesday to hold short-term interest rates steady, while saying it stood ready to cut rates in the future, left many beleaguered investors with no reason to hold battered stocks in the near term.
Amid the mounting number of companies warning about weak profits, and signs throughout the economy that consumer and business spending is slowing sharply, Wall Street increasingly fears that the nation will tumble into recession in 2001.
“This is clearly a slowing economy that needs a catalyst. But the Fed just turns its head the other way,” said Todd Salamone, director of research at Schaeffer’s Investment Research in Cincinnati.
That sentiment, however, is far from universal. Many analysts believe that although the economy is decelerating, it is so far in no danger of recession--despite the stock market’s evident concern.
“This slowdown still looks temporary,” said James Annable, director of economics for Bank One in Chicago.
Moreover, many experts say the Fed, under Chairman Alan Greenspan, does not want to foster the notion that it is ever-ready to bail out stock investors who took risks that they now have come to regret.
“The Fed does not want the market to view them as bailing out an orderly decline” in share prices, Annable said.
If Wednesday’s market slide was orderly, it was nonetheless another body blow to technology stocks that just nine months ago had been the darlings of Wall Street and Main Street.
Trading on the Nasdaq market reached 2.79 billion shares, the second-heaviest session in history, and such tech leaders as computer networker Cisco Systems, software giant Adobe Systems and online auction site EBay all fell more than 10% for the day, adding to already steep declines.
The Nasdaq index has now fallen 53.8% from its March record high. Market declines of this magnitude have occurred only twice in the modern era: during the Great Depression of the 1930s, and in 1973-’74, which ranked as the worst economic slump since the Depression.
The parallels have helped fuel concern that the market is predicting a deep recession. But Wall Street veterans point out that many previous market drops did not foreshadow economic trouble.
The urgency of the selling in recent days also may have to do with the calendar, some analysts say. Investors may be recording losses on stocks for tax purposes, with the idea of putting money back into the market in January.
In any case, there is a widespread sense that tech stocks’ losses are bringing those share prices back to earth after the unprecedented run-up in 1999 and early this year.
Glen Scott, a Burbank building contractor and investor, said he isn’t surprised by what has happened. “I think the market was really out of line . . . and it’s coming back to reality,” he said.
But Scott, like many other investors, is finding that the market’s woes are weighing on his personal finances.
Although broader market indexes such as the blue-chip Standard & Poor’s 500 haven’t fallen as sharply as Nasdaq, their losses have worsened in recent weeks. The S&P; 500 now is down 17.2% from its March peak.
“It’s definitely affecting me,” Scott said of Wall Street’s slide. “The pace the market was going, I thought for sure I was going to be able to bail out and buy a house this year. Now, I think I waited too long. I should have jumped out earlier.”
That negative psychology is threatening to cause many consumers and businesses to cut their spending plans out of fear of what 2001 might bring. That can create a vicious cycle, in which the idea of a slowing economy becomes a self-fulfilling prophecy.
On Wednesday, brokerage giant Merrill Lynch, which has been more optimistic than many Wall Street firms about tech equipment spending in 2001, scaled back its projections and downgraded major technology shares.
The tech sector itself, responsible for a large portion of the economy’s boom in recent years as consumers and businesses loaded up on computers and related equipment, now faces a double whammy.
Scores of tech companies have confirmed in recent weeks that orders for their equipment are weakening, fueling the stocks’ meltdown.
In turn, the devastated share prices threaten the companies’ lifeblood--the loyalty of their employees, who are compensated with stock options far more than their peers in old-line industries.
“We’ll see immediate chewing into options and stock programs,” said analyst Rob Enderle of Giga Information Group in Santa Clara, Calif. Reduced compensation then may lead to less motivation and more turnover, further weakening the companies.
“Something like this can really roll out of control. When you’ve got this kind of a sell-off, there is no obvious bottom,” Enderle said.
But economist Annable, among others, argued that the fear of a negative “wealth effect” on the economy from the stock market’s slide is exaggerated. Many Americans, he said, have enjoyed bigger net wealth gains from their homes’ appreciation in recent years than from their stock holdings.
Other economists, however, say the stock market’s struggles may reflect much broader concerns about high corporate and consumer debt levels, soaring energy costs, credit-tightening moves by wary banks and weakness in foreign economies--all factors that could quickly help drive a slowing U.S. economy into recession.
Corporate spending, in particular, “now has the potential to slow dramatically” as weak sales trigger cost cutting and layoffs by companies that then ripple through the economy, said economist Paul Kasriel at Northern Trust Co.
Although tech firms have led the latest round of corporate earnings warnings, such non-tech giants as Coca-Cola, railroad Norfolk Southern, lumber firm Potlatch and auto parts maker TRW also have warned that sales are coming in below forecasts.
AT&T;, struggling with heated competition in the long-distance business, on Wednesday announced it will slash its cash dividend payment to shareholders--a move that would have been unthinkable just a few years ago.
Still, market optimists say that the Federal Reserve may not be too late to keep the economy out of recession if it begins to cut its key rate, now 6.5%, in January--as is widely expected.
The Fed, in its statement Tuesday, said it now believes the risks of higher inflation are outweighed by the risks of further economic weakness. That wording is considered a prelude to rate cuts.
“The Fed still has a powerful means of turning this thing around” by lowering credit costs and boosting psychology, said Jon M. Burnham, manager of the Burnham Fund in New York. “I do think the market will be significantly higher by the end of next year than it is now.”
In the meantime, the market’s ongoing slump provides some people with a moment to gloat.
Bridgyn Martin of Los Angeles said she grew tired early this year of hearing people criticize her and others who weren’t heavily into the stock market as it rocketed.
“If I had all my Christmas club money tied up in the stock market, there would be a lot of empty stockings around here,” she said.
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Times staff writer Kathy M. Kristof contributed to this story.
* SLOWER SPENDING
New surveys suggest that tech-equipment spending will slow in 2001. C1
* SAFE HAVENS
Investors fleeing tech stocks rushed into drug and utility shares and Treasury bonds. C4
