Plunging Dow Forces Wall St. Reassessment

By TOM PETRUNO

Jan. 17, 2002 12 AM PT

TIMES STAFF WRITER

The stock market tumbled Wednesday amid growing fears that an economic recovery may come later rather than sooner.

The Dow Jones industrial average recorded its biggest one-day decline since Oct. 29, falling 211.88 points, or 2.1%, to 9,712.27. That left the blue-chip index at its lowest level since late November.

The Nasdaq composite plunged 56.47 points, or 2.8%, to 1,944.44, its largest loss since Dec. 20.

Wall Street’s slump in recent days has been mirrored on stock exchanges worldwide, leaving nearly every major market with losses in the new year--on top of back-to-back declines in 2000 and 2001.

As fourth-quarter corporate earnings reports begin to dominate the headlines, analysts say more investors may be waking up to the possibility that the economy won’t stage a meaningful recovery until the second half of 2002, and perhaps not until 2003.

“It was a different kind of recession, and the recovery is likely to be different too. It’s going to take time,” said Chuck Hill, research chief at earnings tracker Thomson Financial/First Call in Boston.

Recessions historically have been caused when demand for goods and services has exceeded supply, fueling inflation and higher interest rates. This time the recession began in the business sector after the 1990s capital spending boom left many industries saturated with competitors--and desperately seeking customers.

Computer chip giant Intel Corp. set a worrisome tone Tuesday when it reported a 77% drop in fourth-quarter earnings and sounded cautious about its near-term outlook. The company also said it will slash capital spending 25% this year.

Intel fell 97 cents to $33.71 on Wednesday and helped trigger deeper declines in many other tech stocks--particularly those of companies that may be hurt by Intel’s reduced spending. Among makers of chip-manufacturing equipment, Applied Materials sank $4.06 to $41.55 and KLA-Tencor dived $5.30 to $50.01.

Losers swamped winners by about 2 to 1 on the New York Stock Exchange and on Nasdaq, as trading volume rose.

Along with technology, shares of brokerage, energy and heavy- industry companies were sharply lower. In the Dow, 3M slumped $6.03 to $103.47 and United Technologies dropped $2.07 to $59.05.

New data Wednesday pointed to an economy still in decline in December, although the rate of descent may have slowed. The Federal Reserve’s index of industrial production eased 0.1% for the month.

Indeed, Fed officials have in recent weeks warned that the economy may struggle for some time, even if the recession that began last spring has ended. Fed Chairman Alan Greenspan, in a speech Friday, emphasized that he saw significant risks to the economy in the near term. His comments have helped drive share prices lower in recent days, many analysts say.

The problem for the stock market is that it got ahead of itself, some say: Share prices rebounded strongly in the fourth quarter, anticipating an economic recovery. Many stocks, particularly in the technology sector, are trading at high price-to-earnings ratios even based on best-case earnings estimates for 2002 and 2003, analysts note.

Intel shares, for example, have risen 75% since Sept. 21 and are priced at about 34 times the $1 a share that analysts, on average, expect the company to earn in 2003, assuming the economy revives. That price-to-earnings ratio is about twice the company’s expected annualized profit growth rate over the next five years, according to earnings tracker Zacks Investment Research.

Still, some analysts warn against reading too much into the market’s latest pullback, given the fourth-quarter surge.

“Typically after recoveries from bear markets you get a period of consolidation” before the next big move up, said Arnold Kaufman, editor of Standard & Poor’s Outlook investment newsletter in New York.

Even if the economy won’t start a meaningful recovery until summer, he said, “I don’t think that justifies a [sharp] pullback in the market now.”

And although tech stock valuations may be high, he said, the average non-tech blue-chip stock may be selling for closer to 15 times estimated 2002 earnings per share--near the historical average.

“People are nervous, and they should be” after two years of losses on Wall Street, Kaufman said. “But I think you have to grit your teeth and buy” if you believe the recession is over, he said.

Others, such as John McGinley, editor of the Technical Trends market newsletter in Wilton, Conn., warn that the key stock indexes could revisit their three-year lows reached in September. He questions whether many investors simply are too optimistic about the economic and market outlooks, in the face of challenges that Greenspan himself cites as “significant.”

A weekly poll of investment newsletters by Investors Intelligence shows the percentage of newsletter editors who are bullish has risen to about 52%, from 34% in September.

That poll often has proved to be a “contrarian” indicator--meaning that when the bulls move solidly into the majority, it often foretells at least a near-term market peak.

Instead of stocks, more investors have been plowing money into bonds in recent weeks, driving yields lower. The yield on the 10-year Treasury note has fallen from 5.02% at year-end to 4.84% as of Wednesday. But the Treasury market didn’t benefit much Wednesday from stocks’ slide: Yields were mostly little changed.

Some investors turned to gold: Near-term gold futures prices in New York gained $2.90 to $287.30 an ounce. Gold has risen from $278.70 at year-end.

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Rough Start

Major world stock markets have slumped so far this year, adding to heavy losses suffered in 2001. A sampling:

Percentage decline:

Market/index 2002 2001

Spain/IBEX -7.1% -7.8%

France/CAC -4.3 -22.0

Hong Kong/Hang Seng -3.8 -24.5

Japan/Nikkei -3.5 -23.5

Germany/DAX -3.4 -19.8

U.S./S&P; 500 -1.8 -13.0