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Market Meltdown

Dow Plunges 512, Nasdaq 140 as Global Woes Spread Panic

September 01, 1998| From Bloomberg News

NEW YORK — U.S. stocks tumbled for a fourth day, with the Dow Jones industrial average plunging more than 500 points, as investors rushed to sell shares amid concern that the eight-year bull market is coming to an end.

The Nasdaq composite index, filled with high-tech stocks, fell 140.43, or 8.6%, to 1,499.25, its worst decline since the crash of October 1987. The Dow average lost 512.61, or 6.4%, to 7,539.07. The Standard & Poor's 500 index fell 69.86, or 6.8%, to 957.28. The Dow average and the S&P suffered their worst declines since October. All three indexes are down for the year.

Monday's declines mark "a very severe correction," said David Mead, chief investment officer at Harris Bank in Chicago, which oversees $25 billion. Unless the Federal Reserve cuts interest rates, "we could very easily go into a recession and that will mean a bear market," Mead said, adding that he didn't sell or buy any stocks today.

Technology stocks, which propelled the market through the 1990s, led the declines. Dell Computer Corp., Cisco Systems, Microsoft Corp. and Intel Corp. were the most actively traded in the U.S. About seven stocks fell for each one that rose on the New York Stock Exchange, and 2,927 companies hit new lows in U.S. composite trading. Only 39 rose to new highs.

The rout in stocks follows a tumultuous week in world markets, with Russia devaluing its currency and defaulting on debt. That raised the specter of slowdowns in other emerging markets.

Trading was the third-heaviest ever on the Big Board, with 916 million shares changing hands. Monday's drop in the Dow average was the second-largest ever in point terms, although not even in the top 20 in percentage terms.

Dell fell $18.75 to $100, Microsoft lost $9.31 to $95.94 and Intel dropped $5.81 to $71.18. Cisco Systems, which was up 63% for the year, lost $12.81 to $81.87.

International Business Machines Corp., the world's biggest computer company, fell $9.94 to $112.63 and Hewlett-Packard Co. dropped $2.94 to $48.56. Investors have been willing to pay higher than the market price for IBM, even as its shares fell for the past two months, according to buying and selling patterns compiled by Bloomberg Analytics. Such positive money flow often indicates that investors think a stock is undervalued.

Microsoft's decline was exacerbated by reports that the U.S. government is gathering allegations that the world's largest software maker pressured rivals to stay out of certain markets. The allegations will bolster the government's contention that the software giant illegally defended its Windows operating system from competitors.

Companies that make computers and the equipment to link them were buoyed in the past four months as the rest of the market weakened. Until today, the Nasdaq 100 index of the largest nonfinancial companies was up 28% for the year. Now, it's up 15%.

"The world ain't safe anymore," said Richard Dahlberg, head of U.S. equities at Salomon Brothers Asset Management Inc.

Evidence that investors expect the economy to slow came from a slide in retail stocks. Those shares rallied in recent months on the view that the consumer-fueled U.S. economy would hold up even as growth in other countries slowed.

Wal-Mart Stores Inc. fell $6.37 to $59, Home Depot Inc. lost $4.31 to $38.13 and Dayton Hudson Corp. lost $7.19 to $36.75.

A slowing of economies outside the U.S. is likely to wash over the domestic economy and prompt the Federal Reserve to lower interest rates, said Richard Hoey, chief economist and a money manager at Dreyfus Corp., which manages $90 billion. That would support higher stock prices, since low rates fuel spending and cut the cost of financing business.

Monday's report from the National Assn. of Purchasing Management for Chicago showed a slowdown in Midwest manufacturing, indicating the U.S. economy is heading for trouble, Mead said.

The group's index of regional factory activity declined to a 2 1/2-year low of 49.3 in August from 57.6 in July. A reading below 50 points to weakness, and economists were expecting an August reading of 56.5. Federal Reserve Chairman Alan Greenspan is monitoring U.S. markets, though he has no immediate plans to make a statement, a spokeswoman said.

Money has flown out of markets around the world, including U.S. equities, and into U.S. Treasury bonds, pushing the yield on the 30-year bond to a record low 5.25%. Commodity prices as measured by the Bridge-CRB Index slumped to a 21-year low Friday.

If the Dow industrials drop another 69.47 points, the 30-stock benchmark will have fallen 20% from its record 9,337.97, set on July 17. That's the broadly accepted definition of a bear market.

For some investors, this level is close enough. "We now have a bear market," said J. Thomas Madden, chief investment officer at Federated Investors, which oversees $100 billion.

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