Dow Drops 218; Now in ‘Correction’
Blue-chip stocks officially sank into a correction Friday, and leading technology issues also fell hard as investors were left scratching their heads at the end of another volatile week of trading.
Bonds rallied strongly, however, after recent weakness.
The Dow Jones industrial average plummeted 218.42 points, or 2.1%, to 10,425.21 as old-line industrial and cyclical stocks continued their recent decline amid the specter of higher interest rates. The Dow is now down 11% from its Jan. 14 high--surpassing the 10% drop that is commonly thought to mark a “correction.”
The Nasdaq Stock Market sank 90.18 points, or 2%, to 4,395.45 on hefty volume as large-cap technology stocks were battered across the board.
Both the Dow and Nasdaq were clipped by a drop in Microsoft, which fell $6.06 to $99.94 after an outside research firm said the company’s Windows 2000 upgrade may have compatibility problems with older software, a worry that could slow sales.
But the tech losses extended beyond the software giant. Cisco Systems fell $5 to $130.94, Broadcom was off $11.88 to $337.13 and Applied Materials skidded $9.75 to $165.
However, the selling in tech appeared largely to be profit-taking, analysts said, following a string of new highs on the Nasdaq.
Despite Friday’s weakness in tech stocks, market watchers are troubled by the market’s split personality in which technology stocks generally shrug off interest-rate worries to forge higher, while nontech names continue to slide.
“There are two markets. There’s the real world and the virtual world,” said Scott Bleier, chief investment strategist at Prime Charter Ltd., a New York investment bank. “The virtual world does not follow the old rules and the old world is beholden to them, and the main rule it’s beholden to is that in a rising interest-rate environment the market usually languishes.”
For the week, the Dow dropped 4.9%, its biggest loss since mid-October, and the S&P; 500 fell 2.6%. The Nasdaq gained 3.6%.
The Dow’s slide in the last month has dropped the index back to the level at which it traded last April. The Dow has slipped below its 200-day moving average, a troubling sign to technical analysts.
Old-line manufacturing companies have been hit hardest. DuPont, for example, has plunged to $50.75 from $71.63 on Jan. 7. Caterpillar has fallen to $36 from $53.31 in that period.
The Standard & Poor’s 500-stock index is down 5.6% from its Dec. 31 peak.
The likelihood that the Fed will hike interest rates again in the next several months has some market watchers worried that stocks could weaken further.
Market professionals were encouraged early in the year by a nascent rally in smaller stocks and by signs that gains were broadening to long-neglected sectors such as cyclical stocks. However, those forces have largely reversed in recent weeks.
Though some smaller stocks have kept rallying, the gains have been concentrated largely in richly priced technology and biotech issues. Meanwhile, overall breadth, a measure of the number of stocks that rise each day compared with those that fall, has worsened.
Friday, declining issues swamped advancers by a 2-1 ratio on the New York Stock Exchange.
NYSE composite volume totaled 1.26 billion shares, on par with the previous session.
“It’s been an ugly market in terms of quality of leadership,” said Larry Rice, chief investment officer at Josephthal. “It’s nice to see Cisco and Intel go up. But they’ve been accompanied by speculative [activity], such as the huge moves in biotech, which are not the quality leadership you expect in the market.”
Tech-related shares have risen as much as they have because of “momentum” investors--professionals and individuals--who jump on stocks that already are rising and propel them to more furious gains than they otherwise would notch, said Hugh Johnson, chief investment officer at First Albany Corp.
“There are still plenty of die-hard momentum investors, and they’ll buy what’s working,” he said. “Some of the conditions that ordinarily signal the end of a bull market and the start of a bear market have moved farther along.”
Not everyone is worried.
Robert W. Bissell, chief investment officer of Wells Capital Management, believes tech stocks will continue to perform well because companies of all stripes must invest in the sector to become more productive and to do more business over the Internet. He points to last week’s report on strong productivity growth as proof that tight labor markets will not cause inflation to spiral out of control.
“The people who read [this market] as a correction and a get-out sort of thing are misreading what is really happening in the world,” Bissell said.
Among other “old economy” stocks getting hit Friday, International Paper dropped $1.06 to $42.69 and Chevron lost $2.81 to $74.
Merck sagged $3.75 to $65.25, its third straight drop, on concern it doesn’t have enough new drugs in the pipeline.
Bond yields eased after a Commerce Department report showed January retail sales coming in weaker than expected. Retail sales rose 0.3%, less than the 0.7% forecast. Excluding volatile auto sales, retail sales fell by 0.3%.
The benchmark 30-year Treasury bond yield ended at 6.26%, down from 6.43% on Thursday.
Market Roundup, C4
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Troubled Bull Market
Friday’s plunge in the Dow Jones industrial average left it down 11% from its January record high, meaning the index now is officially in a “correction.” The tech-heavy Nasdaq composite index has been surging while the “old economy” stocks have tumbled, but even some tech leaders, including Microsoft, are showing strain.
‘Old Economy’ Stocks Sink . . .
*--*
Recent Friday Percentage Stock peak* close drop CSX $35.56 $21.63 -39.2% Dupont 71.63 50.75 -29.1% Deere 48.13 36.19 -24.8% Philip Morris 24.50 19.06 -22.2% Procter & Gamble 117.75 93.75 -20.4% 3M 102.75 82.94 -19.3% Berkshire Hathaway B 1,820.00 1,507.00 -17.2% Merck 78.63 65.25 -17.0% Boeing 47.63 39.88 -16.3% Exxon Mobil 85.56 73.88 -13.7% Dow industrials 11,722.98 10,425.21 -11.0% S&P; 500 1,469.25 1,387.12 -5.6% Nasdaq composite 4,485.63 4,395.45 -2.0%
*--*
*January highs except for S&P; (Dec. 31) and Nasdaq (Thursday)
. . . And Microsoft is Going With Them
Microsoft daily closes on Nasdaq:
Friday: $99.94, down $6.06
Source: Bloomberg News
Installation for Windows 2000. Analysts expectations of problems with the latest version of Windows sent Microsoft shares tumbling on Friday.
