Wall Street Stumbles but Avoids Free Fall

Stocks stumbled badly Monday but avoided the crash many investors were braced for in the wake of Friday’s dramatic sell-off.

The Dow Jones industrial average dived 234.68 points, or 2.9%, to 7,784.58 in volatile trading, closing below the 8,000 level for the first time since October 1998.

Though the blue-chip Dow’s loss was smaller than Friday’s 390-point plunge, it was hardly comforting to millions of investors whose stock holdings have been shrinking almost relentlessly over the last nine weeks, extending a market decline that is now 28 months old.

Many analysts remain reluctant to predict that the selling wave is abating.

“Investors have totally lost confidence in the stock market and they’re throwing in the towel,” said Steve Colton, manager of the Phoenix-Oakhurst Growth & Income fund in Scotts Valley, Calif. “We’re definitely going through the ‘capitulation’ phase, but unfortunately, I don’t know how long it will last.”

Broader market indexes, including the Standard & Poor’s 500 and the Nasdaq composite, also fell in the range of 3% Monday, to new five-year lows.

Wall Street feared that Friday’s Dow loss, which occurred amid record trading volume on the New York Stock Exchange, would set up an even bigger decline Monday.

Instead, the market edged higher shortly after the opening bell, and for a few minutes seemed soothed by upbeat comments President Bush made about the economy and about potential value in the stock market.

But sellers quickly took control, and by midday the Dow was down 302 points. That gave way to an afternoon rally, then another sell-off before the close of trading. NYSE share volume was the fifth-heaviest ever.

The record bankruptcy filing Sunday of telecom giant WorldCom Inc., though expected, again reminded investors of the magnitude of corporate scandals that have devastated confidence in companies’ financial reporting and in their stocks this year.

Also Monday, a Senate panel released documents that showed how Citigroup, the nation’s largest bank, helped insolvent energy trader Enron Corp. devise some of the controversial financial transactions that allowed Enron to conceal its heavy debt load.

Citigroup said its dealings with Enron were “entirely appropriate at the time.” But investors hammered the bank’s stock, sending it down $3.96, or 11%, to $32.04. It was the biggest loser among the 30 shares in the Dow index.

The losses racked up by the nation’s biggest stocks this year have devastated the portfolios of many institutional and individual investors alike. The S&P; 500, the most widely quoted blue-chip index other than the Dow, has tumbled 28.6% this year.

What’s more, the S&P; now is down 46% from its March 2000 all-time high. That is nearing the 48% drop of 1973-74, which was the worst bear market decline of the post-World War II era.

If the S&P; index surpasses its 1973-74 drop, it could deal a further psychological blow to investors and raise anew the question of where the decline will finally end, experts say.

Some investors already have lost more than half their portfolio value: The technology-dominated Nasdaq index, which soared with the “new-economy” stocks of the late 1990s, now is 75% off its peak.

Money managers say the selling in recent weeks has slammed nearly every stock sector, unlike in 2001 and earlier this year, when many non-tech stocks were rallying.

“The carnage used to be somewhat selective, but now there is literally no place to hide,” said Bill Whitlow, manager of the Safeco Northwest fund in Seattle.

Pessimism has become so rampant that even companies reporting good news, such as home builder D.R. Horton Inc.--which topped analysts’ expectations in a “blowout” quarterly earnings report on Monday--are getting hammered, said Philip Orlando, chief investment officer at Value Line Asset Management in New York.

Despite its report, D.R. Horton shares fell 5.5%.

Analysts said the market now is under pressure from selling by stock mutual fund managers as more individual investors cash out.

Investors pulled a net $13.8 billion out of stock funds in June, the first net redemptions since September, according to an estimate Monday by data tracker Lipper Inc.

This month, outflows have been at an even steeper pace, according to TrimTabs.com Investment Research in Santa Rosa, Calif.: In the five sessions ended Thursday, a net $15.6 billion was yanked from stock funds, TrimTabs estimates.

“Shareholders are making daily withdrawals, so I’m forced to sell stocks even though I don’t want to,” said the Phoenix-Oakhurst fund’s Colton. This is the first time during his 12 years as a fund manager that Colton has been in such a predicament, he said.

Yet many small investors say they are continuing to hold on to their stocks and stock funds.

“I’m not going to sell now--I think it’s absolutely crazy to do that. I’m just sitting and waiting for it to get better,” said Sandy Verrall, 57, of Laguna Hills, who said the weak economy pushed her to decide last year to come out of retirement and work part time.

Brenda Cross, 45, of Lake Forest, who works as an engineer for Western Digital Corp., said the market plunge has led her to reconsider timing for retirement.

“It changes your plans,” Cross said. She recently moved some of her 401(k) savings to cash and fixed income securities, but she said she hasn’t pulled entirely out of stocks.

Market optimists say the wave of mutual fund redemptions is among several key signs suggesting that stocks may be close to bottoming. Increased market volatility--such as Monday’s wild swings--also suggests a bottom may be near, some say. These symptoms often occur at the end of major sell-offs.

The S&P; 500’s intraday price swings over the last two weeks have been wider than at any time since September, said Kevin Marder, a Los Angeles-based market strategist at Ladenburg Thalmann Asset Management.

Another potentially positive sign: Announcements of corporate stock buybacks surged last week, indicating that many companies think their shares are undervalued, according to TrimTabs’ president, Charles Biderman.

What’s more, there is plenty of cash on the sidelines that could help fuel a rally, said Ed Yardeni, a strategist at Prudential Securities in New York. Total assets in money market funds and checking and savings accounts have soared to a record $5.9 trillion, Yardeni said.

By contrast, the total in stock mutual funds now is about $3.3 trillion.

The ongoing plunge in share prices also is making many stocks look cheaper, relative to company earnings, than they have been in years, Orlando said. “This is the cheapest market in a generation,” he said.

But many other pros aren’t convinced that enough investors believe shares are attractively priced. And even Orlando concedes, “What’s the catalyst that’s going to move us higher? There’s nothing on the immediate horizon that I see.”

Another risk also looms, some say: Though the economy still appears to be in recovery mode, Colton said he is concerned about the “negative wealth effect” the market slide is creating.

“If it finally causes consumers to stop spending, we could be in for a ‘double dip’ recession,” Colton said.