Nasdaq Sinks to 5-Year Low; Dow Drops 269

By TOM PETRUNO

Aug. 6, 2002 12 AM PT

TIMES STAFF WRITER

A new wave of selling drove the Nasdaq composite index to a fresh five-year low Monday and battered stocks across the board amid growing worries about the economy.

Investors’ hunger for a “safe haven” continued to benefit the Treasury bond market, where yields on some securities fell to their lowest levels in at least a generation.

On Wall Street, a weaker-than-expected report on July activity in the service sector of the economy fanned fears that the U.S. could tip back into recession and sent the Dow Jones industrial average to its third consecutive triple-digit loss.

The Dow tumbled 269.50 points, or 3.2%, to 8,043.63. After rebounding 1,034 points from July 24 through Wednesday, the blue-chip index has surrendered 693 points in the last three sessions.

The technology-dominated Nasdaq index on Monday gave up the last of its gains from the late-July rally, falling 41.91 points, or 3.4%, to 1,206.01, its lowest close since April 1997. The previous Nasdaq closing low was 1,229.05 on July 23.

Stocks slumped Friday after the Labor Department said the economy created a net 6,000 jobs in July, about one-tenth the total analysts had expected.

Other data last week also suggested that the pace of the economic recovery has slowed.

That has undermined perhaps the most important remaining pillar of support for stocks, analysts warned.

In June and for much of July, the market’s dive was blamed on the financial scandals that have soiled corporate America’s image with investors. As stocks slid, many Wall Street pros contended that the economic fundamentals remained solid and that share prices soon would revive based on those fundamentals.

Now, “The economy has replaced confidence [in corporate America] as the No. 1 fear,” said Art Hogan, chief market analyst at brokerage Jefferies & Co. in Boston.

On Monday, the Institute for Supply Management said its index of activity in the non-manufacturing segment of the economy fell to 53.1 in July from 57.2 in June. The new reading indicated that the service sector still is expanding, but at a slowing rate.

If the economic recovery is running out of steam, the recent turnaround in corporate earnings could be threatened, Hogan and others noted. That could deepen concerns about stocks’ valuations relative to underlying earnings.

Trading volume Monday was well below recent record highs, so the sell-off had no great urgency, analysts said. Still, losers swamped winners by 12 to 5 on Nasdaq and by 3 to 1 on the New York Stock Exchange.

The so-called VIX index, which gauges investors’ fear levels by measuring activity input and call options on a blue-chip stock index, closed at 49.31 on Monday, just below the peak of 50.48 reached on July 23--the day before shares resurged.

For many investors in the market in recent days, “the dominant mood has been, ‘Get me out at any price,’ ” said Al Goldman, analyst at brokerage A.G. Edwards & Sons in St. Louis.

Some of the biggest stocks on the NYSE fell by 5% or more on Monday. They included Citigroup, which slid $2.23, or 7.2%, to $28.65, and Walt Disney, which fell $1.04, or 6.8%, to $14.27.

In the technology sector, Intel slid 81 cents to $15.88, Cisco Systems lost 53 cents to $11.36 and IBM dropped $1.89 to $65.99.

European stock markets also were sharply lower Monday. The German market stumbled 5.7%, the French market fell 4% and the Dutch market lost 3.9%.

As investors dumped stocks, some funneled the proceeds into government securities, driving yields on some Treasury issues to their lowest levels in at least 30 years.

The yield on the 2-year T-note ended at 1.89%, down from 2% on Friday and 2.42% a week ago.

The yield on the 10-year T-note, a benchmark for mortgage rates, ended at 4.21%, down from 4.29% Friday and the lowest since November.

Many market pros say the rush into Treasury securities could backfire on buyers, if the economic data in the next few weeks suggest that recession worries are overblown. That could cause yields to whiplash.

“Treasuries are so dangerous at these levels,” Goldman said.

But the main catalyst for the rally in Treasuries is that “people are very afraid,” said Matthew Tucker, fixed-income portfolio manager at Barclays Global Investors in San Francisco.

Moreover, he said, many investors now are betting that the Federal Reserve will help the economy by launching another round of cuts in short-term interest rates.

Lower short-term rates could make yields on longer-term Treasury securities relatively attractive, even at current levels.

The Fed’s key rate, now 1.75%, already is at a 40-year low. But analysts at brokerage Goldman, Sachs & Co. told clients last week that the Fed could cut the rate to 1% by year’s end.

“More people are coming over to that camp,” Tucker said.

Fed policymakers will meet next Tuesday.

Some Wall Street pros have doubted that the Fed would cut rates further, because such a move could frighten investors if they believed the central bank was entering panic mode over the economy.

But as stocks continue to fall, Fed inaction could become the greater risk, Goldman said.

“I think a Fed cut would be a positive thing,” he said.

As for frightening investors, Hogan said: “How much more can we scare them,” given the losses most portfolios have suffered this year.

The Nasdaq index’s decline Monday left it 76.1% below its record high reached in March 2000.

Market Roundup, C9-10

(BEGIN TEXT OF INFOBOX)

Blue-Chip Blues

These blue-chip issues were among those falling at least 5% on Monday amid another broad market decline.

Mon. close

Stock and change

Alcoa $24.10, -$1.40

American Express 30.36, -2.66