Saturday, April 15, 2000
Dow, Nasdaq suffer biggest 1-day drops
Economic measures fuel fear
BY Jeff McKinney
The Cincinnati Enquirer
The tornado that hit Wall Street Friday did substantial damage on Main Street as well.
The Dow Jones Industrial Average suffered its biggest one-day point loss ever as U.S. stocks were clobbered on worries that the largest rise in a key inflation barometer in more than five years could lead to higher interest rates the rest of this year.
The Dow fell 617.78 points to 10,305.77. Even though it was the biggest point loss ever, the drop in relative terms, at 5.66 percent, was not among the highest and was much less than the 22 percent it plummeted in October 1987.
The technology-heavy Nasdaq Composite Index took a bigger beating Friday: It skidded 355.49 points, or 9.67 percent, to 3321.29, bringing its loss for the week to 25 percent. Since reaching a high in early March, the index has lost 34 percent of its value.
For the week, the Dow lost a record 805.71 points, or 7.3 percent, while the Nasdaq ended the week down a record 1,125.16 points.
At one point Friday, the Nasdaq fell to 3265.98, while the Dow bottomed out at 10,201.50.
U.S. investors lost $2.1 trillion this week — and almost half of those losses came Friday.
The selling spread from technology stocks to broader blue-chip issues Friday after news that U.S. consumer prices rose a higher-than-expected 0.7 percent in March. More surprising, the core inflation rate, which excludes the food and energy sectors, rose by 0.4 percent, double the gain that market analysts had expected and the sharpest rise since January 1995.
“That was the telling blow because it gives (Federal Reserve Chairman) Alan Greenspan more ammunition than ever, with possible signs of inflation out there, ... to take whatever action he needed to slow the economy,” said Pete Sorrentino, director of research at Bartlett & Co.
David Hummel, a 23-year-old computer engineer in New York, has seen the $12,000 tax refund he invested three weeks ago cut in half.
“The bears aren't just growling, they're roaming the streets. I'm just glad I don't have a wife I have to explain this to,” Mr. Hummel said as he stared at the flashing stock quotes of the Nasdaq Marketsite in Times Square.
The Nasdaq Stock Market had its second-busiest day ever, with almost 2.6 billion shares changing hands, according to preliminary estimates. The New York Stock Exchange had its seventh-busiest day in history, as 1.279 billion shares changed hands. Economists said the Federal Reserve now could become more aggressive in raising interest rates to halt inflation.
The Fed's policy-setting committee meets May 16, and economists say an increase in interest rates of a half-percentage point is possible. That would be a significant change from the Fed's go-easy approach of raising rates in quarter-point increments five times since June.
Signs of higher inflation are bad news for investors. The reason: Higher inflation and higher interest rates reduce the value of all assets, particularly long-term assets like stocks, said James Berghausen, chief investment officer at Fifth Third Bank.
“This is what people have been fearing for a long time, and it's just taken a lot of air out of the market,” Mr. Berghausen said.
Some economists said investors overreacted to Friday's inflation news.
“No matter how bad this particular report is, it's one month of terrible data amid a long period of very low and stable inflation,” said Gordon Richards, economist for the National Association of Manufacturers in Washington, D.C.
March's increase “is more likely to be a one-time event than the start of a trend,” Mr. Richards said. Other inflation indicators, such as unit labor costs, “are a little higher than last year,” but “those numbers are not consistent with a massive acceleration in inflation.
“The market is definitely overreacting; but the market's been in a hair-trigger mood, and the num bers came at the wrong time.”
But experts said the market is in retreat largely because Friday's economic news compounded reports earlier this week that many U.S. stocks were already trading at too-high levels in an environment of rising interest rates and expectations of even higher rates.
“It's like the tornado siren has sounded, and investors of all stripes are headed for the shelters,” Mr. Sorrentino said.
He said all types of investors are scared. Friday's slide was more significant than earlier this week because almost all sectors, including industrials, technology and financial stocks, got hammered, he said.
The Standard & Poor's 500 index, a measure of the broader stock market, fell 83.95 points, or 6 percent, to 1,356.56.
The Russell 2000, which charts small companies, also racked up its largest one-day point loss in history, tumbling 35.52 to 453.72. On a percentage basis, the Russell 2000's decline was its fifth-sharpest ever.
Mr. Sorrentino noted that even U.S. companies with strong first-quarter profits and record 1999 earnings got hit. He said many of those companies are among their industry's best performers and have strong fundamental operations with long history of profitability.
One example, Cincinnati's Fifth Third Bancorp, regarded by some analysts as banking's best performer, Friday reported a 17 percent gain in first-quarter profits, fueled by double-digit revenue growth. Yet Fifth Third's stock closed at $59.621/2, down $4.25.
Edward Arbaugh III, chief investment officer at PNC Advisers in Cincinnati, said that when you put all those factors together, the market simply could not justify the high stock prices recently.
“It has been a nasty, nasty day, but there are some opportunities out there,” he said.
Mr. Arbaugh said the sell-off provides a window for investors to search for companies that have been ignored for a while. He said investors could find some under valued stocks.
He suggested that investors look for companies with solid, fundamental business operations in several sectors, including banking, consumer products and consumer services and food product companies.
“Where there is gloom, there is opportunity,” he said.
Enquirer reporter John J. Byczkowski and the Associated Press contributed to this report.
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