Stocks slumped Friday as the corporate-earnings warnings that have plagued Wall Street in recent weeks spread to a pillar of defensive investing--drug giant Merck.
"Until we see a shift in earnings momentum, investors are going to be gun-shy about getting aggressive," said Peter Gottlieb, portfolio manager at First Albany Asset Management.
Investors are looking to the Federal Reserve's policy-setting meeting Tuesday and Wednesday for relief. The Fed is expected to lower its key short-term interest rate by at least a quarter percentage point, to 3.75%. But many investors are hoping for a half-point cut. Goldman, Sachs & Co. on Friday became the latest to predict a half-point drop.
News that U.S. military forces in the Persian Gulf region were put on their highest state of alert pressured the market late in the trading session. A U.S. official said a possible attack by anti-American guerrillas triggered the alert.
The Dow Jones industrial average ended down 110.84 points, or 1.0%, at 10,604.59. Merck contributed to 40% of the blue-chip gauge's decline and helped push fellow Dow component Johnson & Johnson down 63 cents to $52.39.
The Nasdaq composite index fell 23.92 points, or 1.2%, to 2,034.84. Fiber-optic parts maker JDS Uniphase, which rose 85 cents to $11.76, and networking computer company Sun Microsystems, which climbed 14 cents to $14.47, offered Nasdaq support.
The broad Standard & Poor's 500 index fell 0.9%.
Declining issues led advancers by 3 to 2 on the New York Stock Exchange and by 11 to 8 on Nasdaq. Volume was moderate.
For the week, the Dow fell nearly 0.2%, the Nasdaq gained 0.3% and the S&P 500 added 0.9%.
Year-to-date, the Dow is down 1.7%, the Nasdaq composite is off 17.6% and the S&P 500 is down 7.2%.
Merck sank $6.67 to $67.80 after the world's No. 3 drug maker warned that full-year earnings would be below previous projections because of weak sales of its flagship arthritis drug, Vioxx, and the strong dollar cutting into overseas sales.
Schering-Plough lost $2.65, to close at $37.90, on growing fears that the launch of new drugs will be delayed. And the Amex pharmaceutical index lost 3.6%.
"This group has been a bastion of safety for the past few months and now it's getting slaughtered," said Tom Schrader, head of listed trading at Legg Mason Wood Walker.
In another sign of economic trouble, Manugistics Group tumbled $10.97 to $25.40 after the company's quarterly results suggested the flagging U.S. economy is hurting its software licensing business. And Fluor, the No. 1 engineering services firm, fell $3.74 to $45.04 on fears that earnings will be less than expected.
Still, some investors saw a silver lining within the cloud of bad news. Micron Technology, one of the biggest makers of memory chips used in personal computers, reported quarterly results that missed analysts' forecasts but still gained 67 cents to $38.38.
Analysts say one problem the stock market has faced in recent weeks is a drop-off in new cash inflows to stock mutual funds.
Investors, disheartened by the market's renewed slide, reduced their net U.S. stock fund purchases to $11.1 billion in May, data tracker Lipper Inc. estimated Thursday.
The May inflows were off from April, when investors put $19.3 billion into stock funds, according to the Investment Company Institute.
June looks even grimmer and is expected to see net inflows of only $1.7 billion, fund data company TrimTabs.com estimated.
Among Friday's highlights:
* San Francisco-based Gap slumped $1.51 to $32.03 after the No. 1 U.S. apparel chain said it will cut 5% to 7% of its headquarters staff of 10,000 and trim store expansion plans to revive sagging profit and sales.
Other retailers also pulled back. Ann Taylor sank $1.85 to $36, Abercrombie & Fitch lost $2.44 to $43.54 and Men's Wearhouse slide $2.61 to $26.69.
* Treasury bonds rallied, pushing yields to 2 1/2-year lows, on signs of slower economic growth and worries about the Mideast. The yield on the benchmark 10-year T-note fell to 5.12%, down from Thursday's close of 5.17%.
Market Roundup, C4, C5