Stocks tumble on weak earnings reports
Gray Friday?
It was just a quirk of the calendar that stocks fell hard on the quarter-century anniversary of the 1987 market crash.
Friday’s 205-point drop in the Dow Jones industrial average was far less dramatic than the infamous 508-point collapse on Black Monday, which at the time was a 23% plunge.
Still, investors were rattled by disappointing earnings reports from bellwethers such as General Electric Co., Microsoft Corp. and McDonald’s Corp.
The Dow suffered its worst drubbing in four months, skidding 205.43 points, or 1.5%, to 13,343.51. The Standard & Poor’s 500 index declined 24.15 points, or 1.7%, to 1,433.19.
Technology stocks, which had been leading the market higher for much of this year, took a beating that extended declines over the past few weeks. The Nasdaq composite index lost 67.24 points, or 2.2%, to 3,005.62.
“What is hitting home is the recognition that market leaders, particularly in the technology sector, are not putting up the growth numbers you would expect to see in a robust economy,” said Patrick O’Hare, chief market analyst at briefing.com.
Google Inc., which fell 8% Thursday on softer-than-expected earnings, slipped an additional 2%. Microsoft gave up 3% and is off 9% in the last month.
Apple Inc., sagged nearly 4% and has shed 13% since hitting an all-time record above $702 a month ago. It closed below $610 Friday.
Still, the market has held up fairly well given the dispiriting profit news, analysts said. The S&P; managed to eke out a 0.3% gain for the week.
In a positive sign, investors who are dumping tech stocks appear to be redirecting much of their cash into other sectors rather than abandoning the market altogether, analysts said.
Generally upbeat economic news has buoyed the spirits of investors, who are hoping that increased activity will translate into rosier corporate earnings early next year.
“The net effect is no harm, no foul,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “Everyone knew earnings were going to be not particularly appealing.”
And they haven’t been.
Third-quarter profits at S&P; 500 companies are expected to slide an average 1.8%, their worst performance in three years, according to Thomson Reuters.
Sales at General Electric fell shy of analyst estimates, leading the industrial behemoth to cut its full-year revenue outlook.
At Microsoft, revenue and earnings were short of expectations as the company grapples with declining sales of personal computers.
McDonald’s missed estimates and suffered slowing growth at its restaurants worldwide.
Besides earnings, some investors are unnerved by the possibility that Mitt Romney could be elected president, said Bill King, chief market strategist at M. Ramsey King Securities in Burr Ridge, Ill.
Though some investors consider Romney more business-friendly than President Obama, others are worried that he would blunt efforts by the Federal Reserve to stimulate the economy.
“People went, ‘Oh my God, yes, he really could win.’” King said.
Though the timing was a coincidence, the drop in the market highlighted the contrast between now and 1987, particularly the divergent moods of small investors.
Following the dismal performance of the 1970s, individual investors began warming to the market as share prices climbed in the 1980s. They blinked only briefly in 1987 as stock values recovered quickly from Black Monday, and their infatuation with stocks crested in the late 1990s during the Internet-stock craze.
But their faith was shaken as stocks descended into two punishing bear markets over the next decade.
“Individual investor psychology now is just flat-out low,” analyst O’Hare said. “It’s been the experience of the 2008-2009 crash, as well as the popping of the tech bubble, and even going back to 1987.
“There are people who are really worried that the stock market has become a gambling arena more than anything else,” he said.
Some experts worry that the encroachment of powerful technology and hyper-aggressive trading in recent years has made the market more vulnerable to the sort of computer-driven decline that first struck on Black Monday, when so-called program trading was blamed for exacerbating the sell-off. While technology glitches continue to threaten the markets, many analysts believe that trading is propelled by the age-old forces of fear and greed.
“The market is no safer, nor is it less safe, than it was on Black Monday,” said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.
“It is still the same market driven by the same sorts of people with the same hopes and fears,” he said. “When people get really scared, they react exactly as they have in the past and as they will in the future.”
