Dow Plunges 436 as Panicked Sellers Flee From Stocks
Wall Street’s slow-motion crash gave way to some panic selling Monday, as the blue-chip Dow Jones industrial average dropped more than 400 points and the Nasdaq composite index sank to its worst bear-market loss ever.
It was a global sell-off that began with Japan’s Nikkei stock index falling to a 16-year low and saw substantial losses in markets across Europe and the Americas.
U.S. investors, who for weeks had been pushed closer to the edge by mounting bad news from the technology sector and by fear of spreading losses in the broader stock market, dumped shares in droves.
The tech-dominated Nasdaq composite index plunged 129.40 points, or 6.3%, to 1,923.38, putting its loss from its peak a year ago at nearly 62%--and thus eclipsing the previous record decline set in 1973 and ’74.
It was Nasdaq’s first close below 2,000 since December 1998, and came on top of a 5% loss Friday.
Significantly, the blue-chip Standard & Poor’s 500 index fell officially into bear-market territory for the first time since 1990, as Monday’s 4.3% drop left it down 22.7% from its peak a year ago. A 20% decline is considered the threshold of a bear market.
The Dow, meanwhile, fell 436.37 points, or 4.1%, to 10,208.25, its fifth-biggest point loss but not a historic drop in percentage terms.
Technology shares were weakest Monday but losses were across the board in heavy trading. All 30 of the Dow industrials lost ground, as did 469 of the S&P; 500 stocks.
Today in Tokyo the U.S. market slide triggered more selling, pushing the Nikkei stock index below 12,000.
Beyond the dismal numbers is a worsening investor psychology that is welcome to some experts and troubling to others.
“I can smell the blood, and I think that’s good,” said Antonio Cecin, head of equity trading at brokerage U.S. Bancorp Piper Jaffray in Minneapolis. He and many other market pros believe there needs to be a climax of fear-induced selling before the market’s decline can run its course.
Many analysts have argued that the drip-by-drip nature of the slide in tech stocks over the last year reflected Americans’ unwillingness to admit that the companies’ business fundamentals were weakening and that the stocks were extremely overvalued after soaring to unprecedented heights in 1999 and early last year.
If the latest sell-off represents the bulk of investors throwing in the towel on tech stocks, the bottom could be reached sooner rather than later, such experts say.
But others worry that rather than a Nasdaq recovery, the next step could be a collapse of the non-tech stocks that have been holding up relatively well.
“It could be, ‘Look out below on the Dow,’ ” said Peter Coolidge, managing director of equity trading at Brean Murray & Co.
Market pessimists read Wall Street’s woes as simply an accurate reflection of what’s going on in the economy, given the sharp slowdown in growth this year. Investors naturally turn cautious when they hear a constant litany of layoff announcements and downward revisions of sales and profit forecasts from companies.
Indeed, one of the catalysts for Monday’s plunge was a report Friday from tech bellwether Cisco Systems that a slowdown in spending on its computer-networking products was spreading from the United States to overseas markets. Cisco also said it would slash 8,000 jobs through layoffs and attrition.
Cisco shares, in extraordinarily heavy trading Monday, fell $1.81 to $18.81--their lowest price since November 1998 and 77% below last March’s all-time peak of $82.
Broadcom Corp., which counts Cisco as one of its major customers, has had an even deeper descent. The Irvine communications chip maker fell $5.38 to $33.25 a share Monday--and hit its annual low of $33 during Nasdaq trading. The stock has plunged steeply from its August high of $247.75 a share, which some analysts called overpriced and others saw as a stop on the way to $300.
Newport Beach semiconductor maker Conexant Systems Inc. lost only 75 cents, but its closing price of $11.75 a share is only pennies from its 52-week trading low. Component makers Emulex Corp. in Costa Mesa and QLogic Corp. in Aliso Viejo also dropped, with QLogic closing at $27.13, its lowest point in a year.
Stocks of other major Orange County companies, from medical, financial, services and food industries, also dropped.
Only retail held its own, as clothing companies Wet Seal Inc. in Foothill Ranch and Quiksilver Inc. in Huntington Beach gained 5.7% and 3.8%, respectively. They were two of only a dozen gainers among the 117 companies in the Bloomberg Orange County Index, which closed Monday at 276.01, its lowest point since December 1999.
As discouraged investors pull back from the stock market, cash is piling up on the sidelines. Assets in money-market mutual funds recently hit a record $2 trillion, up from $1.6 trillion last April.
Although in some circumstances a big cash hoard can become the fuel for a stock rally, there are reasons to doubt that will happen soon, some analysts say.
“The cash buildup is entirely consistent with a worsening economy,” said David Webb, executive vice president of Shaker Investments in Cleveland. “As you go into a recession, you typically see high rates of liquidity.”
Webb believes the stock market doldrums could last for years. Capital spending by businesses drove the tech-stock explosion of the late 1990s and early 2000, but exhaustion has set in and that rate of investment is tapering off, he said. That implies that sales and earnings of tech firms will not soon return to white-hot growth rates.
Moreover, the consumer-spending boom of recent years has left American households feeling tapped out, Webb said. Consumer confidence is plunging along with the Nasdaq index, which makes it unlikely that spending will rebound any time soon, he added.
It would be a serious mistake for investors to try to time the market bottom. There will probably be many sharp rallies that will prove to be false starts, Webb said, noting that Nasdaq leaped 23% in January and then gave it all back. Webb is advising investors to use rallies as selling opportunities.
But many analysts argue that the pessimists are overstating the case. They note that although some sectors of the economy have slowed, others--including housing and autos--are holding up surprisingly well. Many economists doubt that a recession is actually underway.
H. Vernon Winters, chief investment officer of Mellon Private Investment, is among the more sanguine analysts.
His wealthy clients are frozen with indecision at the moment because they, like most investors, are more afraid of losing money than of missing out on the start of a new upward market move.
A setback like the tech-stock collapse changes people’s thinking about risk, he noted. To many investors, Cisco seemed like a perfectly reasonable buy at $82 a share in the midst of a historic Nasdaq run-up, yet at $18 a share now, it’s positively frightening, Winters said.
He believes the cash buildup could fuel a broad advance in stock prices, but only if something major happens to pierce investors’ gloom.
Wall Street had high hopes that the gloom would lift when the Federal Reserve reversed its long credit-tightening campaign and began cutting interest rates in January. However, half-point rate cuts on Jan. 3 and Jan. 31 have failed to do the trick. Indeed, the focus on the Fed as a cure-all seems to have actually hurt the stock market.
Two weeks ago, rumors flew around trading floors that the Fed would vote a surprise rate cut without waiting for its next scheduled meeting, March 20. But the cut didn’t happen, and market psychology only turned darker.
Another tonic for stock prices in recent years has been the influence of brokerage Goldman Sachs & Co.’s oft-quoted investment strategist, Abby Joseph Cohen. Cohen’s optimistic pronouncements have helped the market over potholes several times since 1990.
Last week Cohen recommended that investors reduce their cash and boost their holdings of technology and telecommunications stocks. But after a brief surge, tech stocks slumped anew.
The Nasdaq is down nearly 300 points since her recommendation.
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* GLOBAL MARKETS
Monday’s stock sell-off rippled through the world. C1
* LESSONS FROM PAST
History may not yield clues to the bear market’s duration. C1
