Stocks Plunge 295 Points on Rate-Hike Fears
U.S. stocks sank across the board Friday as investors had a delayed reaction to Federal Reserve Chairman Alan Greenspan’s warning a day earlier that further interest rate hikes are in store.
On a day when the government’s latest inflation report showed few signs of the price pressures that Greenspan so fears, the Dow Jones industrial average dropped 295.05 points, or 2.8%, to 10,219.52.
The slide further extended a pullback that has now sliced almost 13% off the Dow since it hit a record high of 11,723 on Jan. 14. The index is at its lowest level since mid-October.
On Friday, even many technology shares--the market darlings of the last two years and particularly the last four months--fell sharply, after all but ignoring Greenspan’s comments Thursday.
The tech-dominated Nasdaq composite index plummeted 137.18 points, or 3%, to 4,411.74 as such stocks as Microsoft, Intel and Cisco Systems tumbled.
Analysts said the selling in the market overall suggested that even some bullish investors were reconsidering Greenspan’s remarks to Congress on Thursday, in which he said that the Fed’s four rate hikes in the last eight months haven’t slowed the economy--a clear sign that the central bank intends to tighten credit further.
Some investors appear nervous that Greenspan now is specifically targeting the high-flying stock market. Sellers on Friday may have been rushing to exit because they fear a sharper decline will occur soon if the Fed attempts to drive rates higher than Wall Street had already been expecting.
Greenspan has publicly fretted about the so-called wealth effect from a rising market, in which consumers feel freer to spend--fueling the economy--because their stock portfolios are doing so well.
“I can’t remember him being so blunt” about future rate hikes, said Jim Paulsen, chief investment officer of Wells Capital Management. “You’ve got to read this as Alan saying, ‘The stock market has created such a wealth effect that, in order to slow the economy down, we have to take the stock market down.’ ”
To be sure, Greenspan’s stance is controversial in any case. He wants to slow the economy even though inflation pressures have not flared. The government said Friday that consumer prices rose just 0.2% in January, the same as in the prior three months.
On Wall Street, some of Friday’s market decline stemmed from unusual factors. Some traders left early because of the Presidents Day holiday Monday and because of inclement weather in New York. That may have meant a lack of buyers in the market.
And market volatility was greater than usual because of the scheduled expiration of certain stock options and futures contracts, “derivative” securities used by some traders to make or hedge market bets. On such expiration days, traders may buy or sell stocks to offset the expiring contracts, transactions that may have little to do with market fundamentals.
Still, volume on the New York Stock Exchange was about normal at 1 billion shares. Trading activity on Nasdaq was heavy at 1.9 billion shares but below Thursday’s record 2 billion-plus.
Smaller stocks held up well in relative terms. The Russell 2,000 small-stock index fell 2.3%. And the Nasdaq biotech index, which had rocketed 18% on Wednesday and Thursday, dipped 2%.
The fast-money crowd has poured into small- and large-tech, telecom and biotech stocks this year, helping the Nasdaq index but masking weakness in the broad market.
While the Dow and other blue-chip indexes have sunk in recent weeks, the Nasdaq index hit a record high Thursday. It is still up 8.4% this year, after soaring 86% in 1999.
The continuing rally in the tech-related issues--the most highly valued and, in many cases, most speculative shares in the market--has been the equivalent of investors thumbing their nose at Greenspan, who analysts say would clearly like the market to calm down.
“I’m a little bit worried that complacency reigns” among tech investors, said Thomas McManus, market strategist at Banc of America Securities.
Historically, highly valued stocks have been extremely vulnerable to higher interest rates, as investors find they can earn more competitive returns in bonds and other interest-paying instruments.
But today, many investors’ rationale for pouring more money into tech stocks is that, even if the economy slows because of the Fed’s interest-rate hikes, many technology companies will continue to post strong sales and earnings growth.
What’s more, unlike large institutional investors who in the past would move money from stocks to bonds as bond yields rose, many individual investors playing the market today are interested only in stocks and would never buy bonds, experts note.
Indeed, some analysts say the drop in the Nasdaq market Friday was nothing more than a bout of profit-taking. They note that the index also fell sharply in early January and again in late January, yet rebounded quickly both times.
By contrast, the Dow has been weaker because heavy-industry companies are likely to be much more vulnerable to a Fed-induced economic slowdown that could dampen corporate profits, analysts say.
Nevertheless, the recent selling in some leading blue-chip stocks is troubling market pros.
For example, General Electric has plunged in the last two days on very heavy trading volume. The stock fell $5.88 to $125.13 on Friday and now is down 22% from its record reached in late December.
Because GE operates in diverse businesses and its stock is widely held by institutional investors, its fate is thought to be psychologically important for the market.
GE has “helped markets weather a lot of storms and now it’s not there to be of assistance,” said A.C. Moore, chief investment strategist for Dunvegan Associates Inc. in Santa Barbara. “The general market is trying to sink, and it’s being kept alive by some of the hot glamour sectors.”
Some experts say a key test in coming weeks will be whether the Dow can hold above the 10,000 mark. A drop below that mark could unnerve many investors.
The Dow crossed that threshold with much fanfare last March and held above it even in the sharp market pullback of last October. The Dow’s lowest close level in October was 10,019 on Oct. 15.
Times staff writer Tom Petruno contributed to this story.
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Dow Plunges Nearly 300 Points
The blue-chip stock index slumped nearly 300 points Friday amid heightened interest-rate fears. The Dow has now fallen more than 12% from its January record high. C1
