Bears Take Another Bite Out of Market
The bears remained firmly in control of markets worldwide Friday, sending prices broadly and sharply lower.
The Standard & Poor’s 500 index stumbled to levels last seen in October 1998, while other benchmarks neared multiyear lows as well. The S&P; 500 sank 20.62 points, or 1.9%, to 1,085.78; the Dow industrial average slid 234.99 points, or 2.4%, to 9,605.85; and the Nasdaq composite fell 17.94 points, or 1.1%, to 1,687.70.
The average U.S. stock mutual fund is down 16.9% this year. Some major funds have shed more than 30%, including Janus Fund and Fidelity Growth Company, down 30.4% and 30.9%, respectively.
“This is so discouraging for many people,” said John Carey, manager of the Pioneer Fund, which is down 14.8% since Dec. 31. “A lot of investors have never gone through a wringer like this. They’ve never seen this kind of erosion of value.”
Losers swamped winners by more than 2 to 1 Friday on the New York Stock Exchange and on Nasdaq, as only nine of the 87 industry groups in the blue-chip S&P; 500 gained. Trading volume stayed well below spring peaks, however.
For the week, Nasdaq lost 6.5%, the S&P; 500 dropped 4.2% and the Dow fell 3.5%.
Many investors Friday again fled to the relative safety of Treasury bonds, pushing yields lower. Analysts said the grim August employment report issued Friday could spur the Federal Reserve to cut interest rates for the eighth time this year when policymakers meet Oct. 2.
The yield on the benchmark 10-year Treasury note fell to 4.78% from 4.87% on Thursday. Shorter-term yields also dived.
As for equity investors, Banc of America Securities strategist Tom McManus noted in a report that domestic stock funds have seen two straight weeks of net redemptions for the first time since the spring, according to AMG Data Services. “Back from the beach, fund investors do not appear to like what they see happening in the stock market,” he wrote.
“The public is starting to capitulate,” said Will Muggia, manager of the Touchstone Emerging Growth Fund, which is down 6.1% in 2001.
Though he thinks the market could enjoy a brief snap-back rally next week, Muggia worries that investors in tech stocks may be in for additional pain. He cautioned that tech stock valuations remain high because the companies’ profit estimates are falling in tandem with share prices.
“Tech is in a long-term bear market,” Muggia said. “It may get an immediate bounce, but it’s dead as a leadership group for the next several years.”
For portfolio managers, seasonal issues are complicating the fundamental question of how to respond to the signals about the economy and corporate earnings. Many mutual funds sell losing stocks in September and October to record losses for tax purposes.
Some of that selling may have kicked in this week, analysts say, and as it intensifies it may lead the market lower.
“Tax-loss selling is going to be vicious,” Muggia said, noting that widely held tech stocks such as Cisco Systems and EMC are already reeling. Cisco, down 4 cents to $14.36 on Friday, has lost 62% in 2001, and EMC, down 53 cents to $13.35 on the day, has fallen 79%.
Still, some money managers are hopeful that the U.S. economy is bottoming out--which in turn could mean the market is bottoming. “Whether this is a slowdown or a recession, my judgment is that we’re at the bottom of it,” said Ron Muhlenkamp, whose value-oriented Muhlenkamp Fund is up 1.5% year to date.
Federal tax rebates should help spur consumer spending, he said, and the Fed stands ready to cut interest rates further as needed.
“I can’t find anything to convince me this is not a normal cyclical recession, the kind we used to see every three to five years,” Muhlenkamp said. “It’s just that in the past 19 years, it’s really only happened once [in 1990-91] and people forget what it feels like.”
Another potential positive is that S&P; 500 valuations are starting to look more reasonable, said Russ Koesterich, analyst at Instinet Research in New York.
“The caveat is that the market can overshoot on the downside as well as on the upside,” Koesterich said. “The market may now be hitting a sweet spot if you’re looking out a year, but in the short term it could get worse.”
Yet for long-term investors, the broad market looks like a bargain, some managers say. “If you believe, as I do, that the economy is no worse than it was in ‘90-91, this is probably a great time to buy stocks,” Muhlenkamp said. “All it takes is cash and stomach. The head part is easy. Now is when I get paid for my stomach.”
Among Friday’s highlights:
* Continuing fears of global recession sent foreign markets lower. Japan’s Nikkei average lost 1.3%, Germany’s DAX slid 3%, Britain’s FT-100 fell 2.6%, and Hong Kong’s Hang Seng lost 2.6%.
* Retailers slumped on the heels of the employment report. Home Depot lost $2.60 to $40.95, Wal-Mart fell $1.15 to $46.22, and Circuit City skidded $3.56 to $12.70.
* Pessimism also took its toll on many blue chips, including Boeing, down $3.66 to $45.18; Pfizer, off $1.45 to $37; and Merrill Lynch, down $3.41 to $46.09.
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Sticker Shock
Here are the 10 biggest stock mutual funds, ranked by asset size, and how they’ve fared in the market’s decline this year.
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Fund YTD loss Fidelity Magellan --15.7% Vanguard Index 500 --17.1 Invest. Co. of Amer. --7.1 Washington Mutual --0.1 Growth Fund of Amer. --17.4 Fidelity Gro. & Inc. --12.1 Fidelity Contrafund --14.0 Janus Fund --28.3 New Perspectives --10.8 Amer. Century Ultra --20.0
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Source: Lipper Inc. *
Market Roundup, C4, C6
