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Stocks Dive on Fears of a Faltering Economy

January 21, 2006|Tom Petruno | Times Staff Writer

The stock market plummeted Friday in heavy trading, sending blue-chip indexes to their worst one-day losses in more than two years, as another surge in oil prices and disappointing earnings from some big-name companies raised new concerns about the economy's health.

The Dow Jones industrial average tumbled 213.32 points, or 2%, to 10,667.39, giving up all of its gains from a rally that had stoked widespread optimism in the first two weeks of the year.

Technology stocks, which had led the new year's advance, were hit hard as some investors fled. Internet search firm Google Inc. suffered its sharpest sell-off since going public 17 months ago. The company's shares fell $36.98, or 8.5%, to end the day at $399.46.

The market's mood turned Friday as crude oil prices topped $68 a barrel, nearing the record of almost $70 that was reached shortly after Hurricane Katrina devastated the Gulf Coast.

Also, General Electric Co., considered a bellwether for the U.S. economy because of its diverse businesses, reported fourth-quarter sales and earnings that were less robust than many investors had hoped.

GE's report, which followed disappointing quarterly results in recent days from other blue-chip firms including computer chip leader Intel Corp. and chemical titan DuPont Co., revived fears that the economy might be decelerating significantly -- which could point to more profit disappointment ahead and undermine stocks.

"The economy is slowing ... and the market is waking up to that," said Robert Doll, chief investment officer at Merrill Lynch Investment Managers.

The Dow's loss Friday was its biggest percentage drop since May 2003, and the first drop of more than 200 points since March of that year.

But many analysts also said stocks simply were overdue for a pullback after a powerful rally that had lifted the Dow more than 8% since mid-October. The widely watched index closed above 11,000 on Jan. 9, its first breach of that level since 2001.

Some experts cautioned against betting that the economy would continue to lose steam.

"Yes, there was a slowdown in the fourth quarter. We know that," said Drew Matus, an economist at brokerage Lehman Bros. in New York. "But I think things are shaping up for a very good first quarter."

Indeed, the government reported Thursday that new claims for unemployment benefits in the week ended Jan. 14 were the lowest since April 2000, a potential sign of strength in the job market.

Investors had entered the new year in high spirits, thanks in part to fresh signs that the Federal Reserve was nearly finished raising interest rates after 18 months of steady increases. The Fed's key rate has risen from 1% in mid-2004 to 4.25% now.

The central bank on Jan. 3 released the minutes of its mid-December meeting. The report said that most Fed policymakers believed that the number of additional rate hikes "probably would not be large."

Historically, an end to rising interest rates has been bullish for the stock market, so long as the economy wasn't in danger of tipping into recession.

Optimism about rates and the economy had helped investors look past a rebound in oil prices since late December, and encouraged some to snap up technology stocks and other issues considered riskier bets. Google shares reached $471 on Jan. 11, up 14% from year-end after rocketing 115% in 2005.

But this week, Wall Street's focus shifted to disturbing events overseas.

Oil prices soared anew Tuesday on concerns about Nigerian militants' attacks on energy facilities in that major crude-exporting nation. Prices also were boosted by fears that the standoff between the United States and Iran over the latter's nuclear research program could lead to a curtailment of oil supplies from that country, even as global demand for energy remains strong.

On Thursday, an audiotape from Al Qaeda leader Osama bin Laden threatening terrorist attacks in the U.S. added to investors' jitters, although the stock market still closed higher.

On Friday, as oil prices in New York shot up $1.52 to $68.35 a barrel, some on Wall Street began to throw in the towel on stocks. The market fell at the outset and continued to slide all day.

The sudden turnabout in the market's mood "tells you that geopolitical risk has moved from the back burner to the front burner," said Michael Panzner, head of trading at Rabo Securities.

It didn't help that stock prices in Japan, which far outpaced U.S. shares last year, plunged for most of this week after prosecutors raided the Tokyo offices of a popular Internet firm on suspicion of financial fraud.

But the bigger concern Friday may have been the earnings report from GE, some analysts said. Its earnings before one-time gains and losses were $5.8 billion in the fourth quarter, up less than 1% from a year earlier. Although the company's profit was in line with analysts' estimates, many investors had hoped GE would beat those expectations. What's more, the company's sales of $40.7 billion were less than expected.

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