Blue-Chip Stock Slump Rattles Wall St.

Major insurance companies and General Motors led a broad market sell-off Thursday, pushing the Dow Jones industrial average to a two-month low.

Coupled with surging oil prices, the severe pounding that some blue-chip, household-name stocks are taking this year is shaking Wall Street’s confidence that the bull market can revive, some analysts say.

The risk is that the slump in big-name stocks could pull “the whole psychology of the market down,” said Robert Bissell, chief investment officer of Wells Capital Management in Los Angeles.

The Dow slid 107.88 points, or 1.1%, to 9,894.45, its lowest close since Aug. 13. The 30-stock index was hit hardest by insurance giant American International Group, which sank $6.99, or 10.4%, to $60, after two of its executives pleaded guilty in an insurance industry fraud probe launched by New York Atty. Gen. Eliot Spitzer.

GM dropped $2.46, or 6%, to $38.84 after it reported third-quarter earnings that were well short of analysts’ estimates and Standard & Poor’s cut the automaker’s bond rating to one notch above junk status.

The wider market also declined for the fifth time in six sessions, as crude oil prices reached another record high, gaining $1.12 to $54.76 a barrel in New York trading.

But the particular woes of some blue-chip stocks have been the big story on Wall Street in recent weeks. Shares of Coca-Cola, Colgate-Palmolive, mortgage leader Fannie Mae and drug titan Merck all suffered sharp hits in September tied to earnings growth concerns.

Thanks in part to Spitzer, AIG is now off 22% from its 2004 peak -- joining Coke, Colgate, Merck, Pfizer, Intel, GM and some other household names that are down more than 20% from their highs this year.

Such stocks are mired in their own bear markets by the classic definition of a decline of at least 20%.

The Dow itself and the Standard & Poor’s 500 index are down less than 10% from their 2004 highs, helped by strength in industry sectors including energy, other commodities, transportation, utilities and aerospace.

But the flurry of bad news from companies long considered to be among the bluest of the blue chips threatens “to set the tone for the rest of the market,” said Art Hogan, veteran analyst at brokerage Jefferies & Co. in Boston.

If the Dow drops below its Aug. 12 close of 9,814.59, it will continue the pattern of “lower highs and lower lows” this year -- meaning that each new rally has ended at a lower level than the previous rally, and each new sell-off has ended at a lower level than the previous sell-off. That is considered an ominously bearish trend and could drive more investors out of the market.

Hogan said the recent streak of declines among big-name stocks was one of the worst he could remember.

It also runs contrary to a widely anticipated market trend. At the start of the year, many Wall Street pros predicted that blue-chip shares would perform better than smaller-company issues in 2004, for the first time since the late 1990s.

The thinking was that, as the Federal Reserve began to raise short-term interest rates, potentially slowing the economy, bigger stocks would provide a safer haven for nervous investors than smaller, more speculative shares.

“That has been just plain wrong,” said Subodh Kumar, investment strategist at CIBC World Markets in New York.

The Dow is down 5.4% year to date and 8% from its recent peak of 10,737.70 reached in February. The S&P; 500 is off 0.8% year to date and 5% from its peak, also reached in February.

By contrast, an S&P; index of 600 smaller stocks has risen 6.1% year to date and hit a record high Oct. 6.

Edward Keon, investment strategist at Prudential Equity Group in New York, believes that the profit-growth struggles of big companies such as Coke and GM are the most visible warnings that growth overall is becoming more difficult to generate as sales slow at many companies while costs rise.

Since 2002, he said, “profitability has been so good that it almost had to go down.” Third-quarter earnings reports will dominate Wall Street headlines for the next few weeks.

In a tougher economy, the better performance of many smaller stocks this year may reflect that investors feel better owning nimbler companies that can react faster to changes in their markets, Kumar said.

Even so, many larger companies also are likely to continue to post healthy earnings growth, said Wells Capital’s Bissell. Investors, he said, would have to be more vigilant about their portfolios and should seek to buy shares of companies with good prospects when they tumble simply because of bad news issued by weaker rivals.

Among Thursday’s market highlights:

* Broader market indexes fell less sharply than the Dow. The S&P; 500 lost 10.36 points, or 0.9%, to 1,103.29; the Nasdaq composite was off 17.51 points, or 0.9%, to 1,903.02.

Falling stocks outnumbered winners by about 3 to 2 on the New York Stock Exchange and 2 to 1 on Nasdaq.

* Treasury bonds benefited as some investors ran for cover. The 10-year T-note yield slid to 4.02% from 4.06% on Wednesday.

* Insurance broker Marsh & McLennan led its sector lower. The company was sued by Spitzer as part of his investigation into allegedly fraudulent practices. Marsh shares dived $11.28, or 24%, to $34.85. Other insurance issues off sharply included Chubb, down $4.09 to $65.65, and Aon, down $4.48 to $23.18.

* Apple Computer bucked the market downtrend, soaring $5.23 to $44.98 after reporting better-than-expected earnings.

* Despite another jump in oil prices, airline stocks gained on reports that America West might bid for rival ATA Holdings. ATA jumped 21 cents to $2.85; America West added 6 cents to $4.90.

* Oil stocks were mostly higher. Marathon Oil rose 94 cents to $40.25; Sunoco rallied $1.27 to $73.57.

* Among new stock issues, Asian cellphone services provider Hutchison Telecommunications fell 41 cents to $11.26 in its first day of U.S. trading. PlanetOut, an online media company serving the gay community, jumped $1.40 to $10.40.

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Blue-chip bombs

Some of the best-known stocks have been among this yearÕs biggest losers.

Thurs. Drop from Stock close Õ04 peak Intel $20.51 -40% Merck 30.19 -38 GM 38.84 -29 Coca-Cola 39.15 -26 Colgate-Palmol. 43.45 -26 Pfizer 29.08 -25 AIG 60.00 -22 Fannie Mae 68.11 -15 Dow 30 9,894.45 -8 S&P; 500 1,103.29 -5

Source: Times research