Stocks Plunge on Corruption Fears
A sharp sell-off Friday interrupted the recent stock rally, as two high-profile corporate investigations reignited fears of more corruption and gloomy brokerage reports dragged down tech shares and highlighted the unsure state of the U.S. economy.
The Dow Jones industrial average and the Standard & Poor’s 500 index notched their fifth straight weekly gains, but it wasn’t pretty: They lost 2% and 2.3%, respectively, Friday as Citigroup and AOL Time Warner were rocked by reports of separate regulatory inquiries.
The Nasdaq composite index staggered to the close of its third straight positive week as Intel and other tech shares slid after reports warned of weaker-than-expected earnings for chip companies and equipment makers.
“The rally is still intact, but there are plenty of things to worry about and there will be times when our emotions get the best of us, just like they did in July,” said Mark Keller, investment strategist at brokerage and asset manager A.G. Edwards in St. Louis.
Nasdaq tumbled 42.33 points Friday, or 3%, to 1,380.62. The Dow slid 180.68 points to 8,872.96, and the Standard & Poor’s 500 lost 21.84 points to 940.86.
Losers topped winners by about 2 to 1 on the New York Stock Exchange and Nasdaq. Trading volume was light, however, even by the standards of late August, when many traders take vacations and the pace on Wall Street slows considerably.
For the week, Nasdaq rose 1.4%, the Dow 1.1% and the S&P; 500 1.3%. The last time the S&P; 500 strung together five winning weeks was in the period ended Sept. 1, 2000.
A security scare also rattled investors Friday as aviation officials cleared passengers from a main terminal at New York’s LaGuardia Airport and delayed flights after word of a possible security breach.
The SOX index of semiconductor-related stocks fell 5.9% on the day, with all 17 members losing ground. The decline was paced by Intel after an analyst scaled back his projection for the top chip maker’s sales to computer makers. Intel lost $1.19 to $17.96.
“Back-to-school demand [for computers] was relatively weak,” Bear Stearns analyst Charles Boucher wrote. “Corporate PC demand is unlikely to show much improvement, leaving the burden on the consumer and the developing markets” this quarter.
Boucher kept his “buy” rating on Intel but cut his per-share profit estimates for 2003 from 85 cents to 82 cents.
Intel couldn’t be reached for comment.
Also, a Banc of America Securities analyst cut profit estimates for chip equipment maker Applied Materials and four of its rivals. Applied Materials fell $1.09 to $15.08.
Dow component Citigroup fell $1.18 to $34 amid reports that New York’s attorney general is investigating whether Jack Grubman, a former analyst at the company’s Salomon Smith Barney brokerage unit, was pressured by Citigroup Chief Executive Sanford Weill to raise his rating on AT&T; stock to help the firm win an investment banking deal. Citigroup said Weill didn’t influence Grubman’s ratings.
Meanwhile, S&P; 500 component AOL Time Warner sank $1.31 to $12.76 as the Securities and Exchange Commission examines whether transactions the company did with Qwest Communications International and WorldCom may have inflated its revenue, according to published reports.
Some analysts saw the sell-off as a temporary setback for a recovering market. Even after Friday’s loss, the S&P; 500 is up 17.9% from its July 23 low.
A.G. Edwards’ Keller said he believes the July jump in stock mutual fund redemptions, which has been estimated at a net $40 billion to $50 billion, probably marked “an important bottom” for the market. Net redemptions of more than 1% of stock fund assets have marked previous bottoms in 1982, 1987 and 1990 when fear has peaked, he said, and last month’s withdrawals could be in the 1.5% range.
On light trading days such as Friday, the market is especially susceptible to any bad news, Keller said, adding that he believes corporate scandal has largely been “priced into” the market.
In next week’s trading, however, home sales data due out Monday and consumer confidence numbers expected Tuesday could have an effect on the market, he said, as investors are eager to see whether U.S. consumers still are supporting the economy.
Among other highlights:
* A rally in the Treasury market pushed down yields as investors sought fixed income as an alternative to stocks. The yield on the benchmark 10-year T-note eased to 4.24% from 4.32% on Thursday.
* The slide in stocks also weakened the U.S. dollar in trading against major currencies, including the euro and the Japanese yen.
* Oil prices continued to retreat from recent highs, sliding 21 cents to $28.63 a barrel. An index of 15 oil service stocks slid 2.7%.
Market Roundup, C4-5
