Dow Drops Below 8,000 as Threat of War Grows
Fears of war hammered stocks worldwide Monday and left the Dow Jones industrial average less than a 10% drop away from its five-year low set in October.
The Dow sank 141.45 points, or 1.7%, to 7,989.56, its seventh loss in eight sessions and the first close below 8,000 in more than three months.
The broader U.S. market also was sharply lower, and European exchanges suffered bigger losses than Wall Street.
After a bullish start to the new year, stocks have crumbled in the last two weeks amid rising worries about the scope and potential outcome of a U.S.-Iraq conflict, and what it may mean for the economy, analysts said.
Many institutional fund managers appear to have shifted from a view that a war would be over quickly -- and decisively in favor of the United States -- to concern that share prices don’t reflect what could go wrong.
David Dreman, a veteran money manager at Dreman Value Management in Red Bank, N.J., said he has been shocked to see his “value”-oriented stock funds give up all of the gains they racked up in the first two weeks of the month.
“I probably didn’t put enough emphasis on the war factor,” Dreman said. “If we’re going to war, it’s going to scare of lot of people,” which could cause consumers and businesses to pull back from spending money.
Individual investor sentiment also has turned much more cautious. An investor optimism index tracked by brokerage firm UBS in New York fell this month after rising in November and December from a record low in October, UBS said Monday.
The index, at 38 this month, dropped from 52 in December. The level is calculated based on investors’ responses to seven questions about the outlook for their finances, the markets and the economy. In the heady days of the bull market in early 2000, the index rose as high as 178.
Some analysts said the most encouraging thing they could say about the market action Monday is that investors’ fear level is surging. That at least raises the prospect that share prices will get where they’re going in a relative hurry.
The so-called VIX index, which measures how worried investors are by tracking their use of “put” and “call” options to hedge their bets on blue-chip stocks, soared Monday to 39.77, the highest since late October, when stocks were rebounding from five-year lows.
But Tony Cecin, a trader at brokerage U.S. Bancorp Piper Jaffray in Minneapolis, noted that New York Stock Exchange trading volume has been declining since Thursday, even as falling stocks outnumbered winners by 3 to 1 on Friday and Monday.
Continuing share price losses on weaker trading volume can be “the worst of all worlds,” he said, because the pattern suggests that investors are just chipping away at their holdings instead of rushing to sell in a flurry that could mark at least a near-term bottom.
“The path of least resistance is down,” Cecin said.
Among key indexes, the Dow has lost 4.2% year to date. If it ends in the red this year, that would mark the fourth straight annual loss -- a streak last recorded in 1929-32.
The Standard & Poor’s 500 index, which fell 13.92 points, or 1.6%, to 847.48 on Monday, is down 3.7% this year.
The technology-dominated Nasdaq composite has fared better: It lost 16.87 points, or 1.3%, to 1,325.27 on Monday and is down less than 1% this year.
Selling slammed many disparate stock sectors, including retailers, drug companies, utilities, oil firms and even defense contractors. Northrop Grumman fell $1.86 to $88.39.
The news that hit the market Monday was as expected. United Nations weapons inspectors told the U.N. Security Council that Iraq “appears not to have come to a genuine acceptance ... of the disarmament which was demanded of it.”
That left many investors to conclude that the Bush administration will decide it has no choice but to invade Iraq.
But with any invasion possibly weeks or months away, investors have little to look forward to in terms of good news between now and then, analysts said. That raises the risk of a continuing decline in share prices if more investors head for the sidelines or simply defer new stock purchases.
For optimists, “I think we’re all searching for something to grab onto, and there’s nothing there,” Cecin said.
On Monday, the action in currency markets and gold was more of the same: The dollar fell to new three-year lows against key currencies, with the euro reaching $1.085. Gold, a classic haven in times of trouble, rose to a six-year high of $370 an ounce in New York futures trading, up $1.60 from Friday.
But Treasury bonds, which normally benefit as money flees stocks, failed to attract a horde of buyers. Yields edged up, with the 10-year T-note rising to 3.96% from 3.93% Friday.
The reaction in European stock markets was much more severe than on Wall Street: Germany’s DAX stock index tumbled 2.7%, and Britain’s main share index sank 3.4% to its lowest level since 1995.
A major fear on Wall Street is that U.S. indexes also will fall through their October lows, which would mean that the bear market that began in 2000 still hasn’t ended -- and, perhaps, that the economy is headed back into recession.
“If any of the major indexes take out the October lows, the risk rises dramatically that we’re in a double-dip recession,” said James Stack, editor of the InvesTech market newsletter in Whitefish, Mont.
If the Dow falls 8.8% from Monday’s close it would drop through the five-year low of 7,286.27 reached Oct. 9. The index has fallen 9.6% since Jan. 14.
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Market Roundup, C8-9
