Fear-Fueled Sell-Off Mires Efforts to Bolster Markets

By THOMAS S. MULLIGAN

Sept. 18, 2001 12 AM PT

TIMES STAFF WRITER

NEW YORK —

The symbol of U.S. capitalism--the stock market--got back to work Monday, but a wave of fear-induced selling overwhelmed efforts by the government, companies and small investors to boost shares in defiance of last week’s terrorist attacks.

With the nation suddenly on a wartime footing and the economy already weak, many investors worried that a sustained rebound for stocks might be long in coming.

The Dow Jones industrial average fell 684.81 points to 8,920.70, its lowest level since 1998. It also was the biggest point drop ever for the blue-chip index.

The Nasdaq composite index, home to many major technology names, dropped 115.83 points to 1,679.55, lowest since 1998 as well.

Yet the day was far from a rout. The Dow and Nasdaq each lost about 7%, well short of a record in percentage terms and about even with the losses that have stacked up in foreign bourses since last week’s terrorist attacks closed U.S. markets for four days.

What’s more, the New York Stock Exchange handled record trading volume with no major glitches, analysts said.

Just getting Wall Street rolling again after the longest trading break since 1933 was a victory for the crews that have been working around the clock to repair blasted pipes, wiring and power systems throughout lower Manhattan.

It also took courage for financial workers to return to the scene of their greatest nightmare. Before the market opened at 9:30 a.m. EDT, traders packed the floor of the NYSE, talking quietly and checking in with one another: Who made it? Who didn’t?

Many brokers pinned flags to their jackets or stitched “USA” patches to the sleeves of their shirts.

“We wanted to put a thumb in the eyes of the murderers and show them they couldn’t stop our economy,” Treasury Secretary Paul H. O’Neill said of Wall Street’s reopening. “We really did it today.”

NYSE Chairman Richard A. Grasso advised investors to focus on the long term, not on Monday’s sell-off.

Some Wall Street bulls suggested that Monday’s plunge could be the final “blowoff” of the bear market that has ravaged stocks for 18 months.

But the risks of further declines remain high, many say--especially if the economy and corporate profits continue to sink.

Investment strategist Christopher Low of First Tennessee Securities said the economy is repairing itself, but in a way that will be painful in the near term.

For the last few months, he said, consumers’ income growth has exceeded consumption growth for the first time in several years. Afraid of mounting layoffs and economic uncertainty, people are reducing debt and slowing their spending, a process that likely will accelerate in the wake of the terrorist attacks.

“It seems obscene to spend on yourself after you’ve seen what people are going through,” Low said. But “unfortunately, that’s the kind of spending that has been fueling this boom.”

Longer term, though, the household belt-tightening will build the savings that will fuel a new round of growth--perhaps as early as the first half of next year, Low said.

That’s why he recently has turned bullish on stocks after two years of misgivings about the market, he said. Stocks typically start climbing months before the economy rebounds, so Low figures the market’s turnaround will come before year end.

Sung Won Sohn, chief economist of Wells Fargo & Co. in Minneapolis, said investors also can take a measure of comfort in knowing that the market usually bounces back quickly after suffering big one-day declines.

Looking at 17 large market declines triggered by major news events--ranging from President Woodrow Wilson’s nervous breakdown in 1919 to President Kennedy’s assassination in 1963--Sohn found that, on average, stocks recovered 80% of their losses within four days. “If history repeats itself, this could be a buying opportunity,” he said.

Yet on Monday, it was distressing even to bullish market pros that stocks failed to benefit from an extraordinary push from the public and private sectors:

* The Federal Reserve weighed in before the market opened with a half-percentage-point cut in its key short-term interest rate, dropping the rate to 3%.

* The Securities and Exchange Commission, preparing for this week’s reopening, last week relaxed certain restrictions on companies’ ability to buy back shares of their own stock--clearing the way for major repurchase announcements from Cisco Systems, FleetBoston Financial and dozens of other firms.

* New York Comptroller H. Carl McCall, who runs the state’s $112-billion pension fund, announced that he bought $250 million in stocks Monday, the first stage of $1 billion in planned new purchases by the fund.

* Many individual investors stepped in to buy shares as a way of expressing their confidence in America.

That was happening all across the country. At brokerage A.G. Edwards’ office in Hemet, Calif., a city with large numbers of retirees on modest incomes, many investors called in to buy stocks, citing “pride and patriotism,” branch manager Vic Compton said.

“I’ve had clients call and say, ‘I don’t care how much money I have in my account--I want to buy something.’ They just want to take $1,000 and make a statement,” Compton said.

But patriotic fervor only runs so deep, noted Peter Einersen, head of an independent trading firm on the NYSE floor.

Investors’ usual motivation is to buy because they expect a profit, he noted. “If you buy for America, you’ve got to hold for at least a couple of years,” he said, implying that in this market, it may take that long to reap a profit from a purely patriotic move.

Sohn said investor confidence is the key to the market’s direction, but it’s at best a tossup as to which way confidence will turn next.

Indeed, analysts worry that the losses of the last year and a half may have done irreparable damage to some peoples’ belief in stocks as “the best investment for the long haul,” as that oft-repeated line goes.

The longer-term outlook for share prices in part reflects investors’ general feelings about how the nation is faring. The market’s stunning gains in the 1990s--not just in terms of stock prices, but also in terms of price-to-earnings ratios and other classic valuation measures--were built on a world in which everything seemed to go right for America, from the fall of communism to the rise of the Internet.

But the new millennium has begun with many of those 1990s trends reversing, and that has implications for the prices people are willing to pay for shares short-term and long-term, analysts note.

Staff writers Walter Hamilton, P.J. Huffstutter, Jonathan Peterson, E. Scott Reckard and Stuart Silverstein contributed to this report.

Fear-Fueled Sell-Off Mires Efforts to Bolster Markets

More to Read

More From the Los Angeles Times