Despite Pleas for Patriotism, Investors Exit Sliding Market

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Stocks suffered their third steep decline in four sessions Thursday, as appeals for patriotism were overwhelmed by many worried investors’ rush to get out of the market.

The Dow Jones industrial average plunged 382.92 points, or 4.4%, to 8,376.21, its lowest since October 1998.

Thursday’s sell-off, in very heavy trading, brought the Dow’s loss to nearly 13% since trading resumed Monday after last week’s terrorist attacks. Many blue-chip shares now have fallen 30% to 50% from their peaks in the last 18 months.


Investors continue to flee stocks on concerns the economy has been tipped into recession, which could further undermine already weak corporate profits. Uncertainty about the U.S. military response to the attacks also is driving foreign and domestic investors out of the market, analysts say.

“Even some of our clients are finally starting to say, ‘I can’t take it anymore,’ ” said Kurt Brouwer, an investment advisor in Tiburon, Calif. “They know in their hearts that the market is going to come back at some point and it’s probably a mistake to sell, but if they were to lose another 50% they just couldn’t stand the pain.”

Many on Wall Street say the grass-roots campaign this week to encourage people to buy stocks, or at least refrain from selling, was hopelessly naive.

Institutional investors, such as mutual funds, have a responsibility to clients first, and if they believe share prices are headed much lower they aren’t going to hold on, analysts note.

“We can’t invest our clients’ money based on [perceived] patriotic duty,” said Scott Bleier, market strategist at investment firm Prime Charter Ltd. in New York.

“The market is going to do what it wants to do,” said Steve Colton, manager of the Phoenix-Oakhurst Growth & Income mutual fund in Scotts Valley, Calif.


“Look at Japan: The Nikkei [stock index] has fallen from 40,000 in 1989 to under 10,000 today despite the government buying stocks. It’s like trying to stop high tide by sticking out your hands,” he said.

Added Jeff Van Harte, manager of the Transamerica Premier Equity fund in San Francisco: “I’m as patriotic as anybody and I love seeing all these flags, but you can’t ignore the fact that [stock] valuations are still fairly high, and those are based on earnings projections that are in jeopardy.”

Indeed, many stocks still are priced at or near historically high levels relative to companies’ underlying earnings.

On Thursday, investors seemed to all but ignore upbeat comments from Federal Reserve Chairman Alan Greenspan, who said at a Senate hearing that the economy’s long-term prospects “have not been significantly diminished” by the terrorist attacks.

Despite Greenspan’s view, fear that the economy’s downturn will worsen dramatically is the driving force in the market’s decline, experts say. But as share prices slide, other factors come into play and trigger more selling.

Though individual investors, on balance, are pulling money out of stock mutual funds, the totals are modest so far. But any outflow can make fund managers decide to sell stocks to raise cash, in anticipation that more people will want their money back. As managers sell, they help push prices lower, potentially making fund redemptions a self-fulfilling prophecy.


Even in the weeks preceding the attacks, there was a trend among 401(k) retirement plan investors to shift money away from stock funds into money-market and bond funds, according to surveys by Chicago-based benefits consultant Hewitt Associates.

The firm said there was a record increase in such transfer activity Monday, after the market’s four-day closure. Transfer activity was back to normal Tuesday, Hewitt said, but moderately heavy Wednesday, as the trend away from stocks continued.

Another problem for some investors is forced sales: Investors who bought stocks on credit, using the shares as collateral, may be forced to dump the stock as their nervous lenders call in their loans.

That was an issue in heavy sales of Walt Disney Co. shares Thursday by the Bass family of Texas. The selling helped drive Disney stock down $1.52 to $16.98, the lowest price since 1995.

Investment advisor Al Frank in Laguna Beach told clients Thursday he sold all or some of his stakes in 27 stocks earlier in the day when he was hit with only his fourth margin call in 25 years.

Meanwhile, some individual investors question the motives behind the patriotic buying campaign.


“I was very suspicious when the talking heads and institutions started talking about buying for patriotic reasons,” said one posting this week at the Raging Bull stock chat Web site. “These folks have been dumping stock and poor Joe Blow is buying. What a waste of money. If one wants to be patriotic, I [say] go spend on goods, take vacations and donate to the Red Cross.”

David Tice, manager of the Prudent Bear mutual fund in Dallas, remains downbeat on the economy and the market. “I don’t think patriotism should have anything to do with people buying stock,” he said. “This is the land of the free. People should make an independent choice based on their own view of their self interest.”

Wall Street optimists, a dwindling camp, say the heavy selling this week could mark the final “capitulation” phase of the now 18-month-long bear market--meaning a bottom could be near. But investors have heard that refrain many times since spring 2000.

From its peak in March 2000, the Standard & Poor’s 500 index of blue-chip stocks is down 35.5%. That eclipses the 34% drop in the 1987 bear market and is the worst since the 1973-74 drop of 48%.

The technology-dominated Nasdaq composite index has fallen 71% from its March 2000 peak. That is approaching stocks’ losses in the Depression, when the Dow lost 89% of its value from 1929 to 1932.

The latest survey of market newsletter editors taken by New Rochelle, N.Y.-based Investors Intelligence shows that those who are bearish on stocks outnumber those who are bullish for the first time since October 1998. This week’s survey showed 37.6% of newsletter editors bearish and 35.7% bullish, with the rest relatively neutral on stocks’ next move.


Optimists note that the market often begins to recover when investor sentiment is at its most negative. For the market to end its downward trend and stabilize, the theory goes, selling pressure has to be exhausted--everyone who wants to sell must have sold.

Previous spikes in bearishness in the newsletter poll, such as in 1994 and 1998, have marked stock market bottoms.

History also shows that the market tends to begin to improve months before the economy does.

But the physical and psychological damage caused by the Sept. 11 terrorist attacks cannot even be quantified yet, many analysts argue. The danger of further terrorist attacks adds extra uncertainty, Brouwer said.

“We’re not necessarily at the bottom,” Brouwer said. “If this were a normal recession scenario I’d say we’re there. But, God forbid, what if some other bad thing happens geopolitically?”

“There are a lot of doomsday scenarios, the idea that people won’t ever take vacations or fly again,” Colton said. “I’m sure things will improve, but we just don’t know when.”


With many stocks at multiyear lows, “Investors are asking, ‘Why do I even own stocks at all if I haven’t made any money in two years?’ ” Colton said. “Stocks are driven by earnings, interest rates, fear and greed. Right now, we’re in fear mode.”


Times staff writers Walter Hamilton and Thomas S. Mulligan contributed to this report.