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Disappointed by Fed Signal, Investors Drive Market Lower


Some surprise.

Stocks took another drubbing Wednesday, pushing the Nasdaq composite index ever closer to a startling 60% drop from its peak, as hopes for a preemptive interest-rate cut by the Federal Reserve again were dashed.

The central bank's chairman, Alan Greenspan, signaled that no action on rates will be taken at least until the Fed's next policy meeting March 20.

So for the second straight day, deflated investors were left to focus anew on the issues that have hammered stocks in recent weeks: the weakening economy and dwindling corporate earnings growth.

The technology-dominated Nasdaq index tumbled 55.99 points, or 2.5%, to 2,151.83, a 26-month low. The index's 22.4% loss in February was its third-worst monthly decline ever.

Nasdaq now is down 57.4% from its record high set March 10. It is close to eclipsing its worst loss ever, the 60% decline in 1973-74.

The broader market wasn't spared Wednesday. The Dow Jones industrial average skidded 141.60 points, or 1.3%, to 10,495.28.

Losers topped winners by 17 to 14 on the New York Stock Exchange and by 23 to 14 on Nasdaq in active trading.

The Standard & Poor's 500 index fell 1.7% and is down 18.8% from its peak last March. A drop of more than 20% would mark the first bear market for the S&P index since 1990, by usual Wall Street standards.

Analysts said investors who bid many stocks higher Friday and Monday on rumors of an imminent rate cut may have underestimated the Fed's reluctance to appear to be bailing out Wall Street.

Greenspan is "trying to calm the markets, but there's no way he's going to play into the bets being made on Wall Street that he'll cut rates before the next Fed meeting," said Robert Goodman, senior economic advisor at Putnam Investments Inc.

That left traders to revisit the debate between those who remain bearish on stocks for the foreseeable future and those who are still bullish long term. Whereas the bulls see the Fed's actions helping the economy and corporate profits turn back up later this year, pessimists contend that the recovery is further away and will be preceded by more dismal corporate earnings--pushing stocks even lower.

For now, the pessimists are winning. "The negative earnings news keeps trumping the positive interest-rate news," said Thomas Van Leuven, market strategist at J.P. Morgan Chase Securities in New York.

Famed investment house Goldman, Sachs & Co. further depressed the tech sector Tuesday by saying it's still too early to jump back into tech stocks generally.

J.P. Morgan Chase hasn't painted the sector with that broad a brush, but it contends "earnings estimates for the broad market and especially for the more cyclical sector are still too optimistic," Van Leuven said.

The cyclical sector, which is especially sensitive to economic swings, includes many of the market's marquee technology firms, he said.

Based on Wall Street's consensus estimate for S&P 500 company earnings for 2001, the index's price now is about 21 times that estimate, according to earnings tracker IBES/Thomson Financial.

But J.P. Morgan Chase sees the S&P 500's earnings falling 11% this year, which would give the index a 2001 price-to-earnings multiple above 24--"which I'd say is historically high," Van Leuven said. "It's especially concerning when we think about how earnings will be disappointing."

Conversely, veteran portfolio manager Karen McGrath of Strong Funds said, "We're a lot closer to the bottom than the top."

In a bulletin to the money manager's customers, she noted that expectations of at least one more rate cut by the Fed, along with the Bush administration's tax-cutting efforts, could provide "stimulus both from monetary policy and fiscal policy" to boost the economy.

Among Wednesday's highlights:

* Chip stocks led tech shares lower on the heels of more profit warnings, the latest coming from Elantec Semiconductor, which plunged $10.88 to $19.81 a share. The SOX semiconductor stock index tumbled 4.9%.

* Brokerage and other financial stocks fell sharply in tandem with the market. Morgan Stanley Dean Witter dropped $4.53 to $65.13, and Merrill Lynch lost $2.80 to $59.90.

* Some investors continued to hunt for "defensive" issues that seem safer in a volatile market. Winners included General Mills, up 77 cents to $44.85; Wrigley, up $1 to $93.12; and Eli Lilly, up $1.46 to $79.46.


Times wire services were used in compiling this report.

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