'Spooked' market takes a tumble Dow falls 38 points amid concern over earnings, Yeltsin

September 22, 1993|By Bloomberg Business News

NEW YORK -- U.S. stocks nose-dived yesterday as fresh political turmoil in Russia compounded concern about the strength of U.S. corporate earnings and rising U.S. interest rates, traders and analysts said.

The Russian situation "spooked the market" as President Boris N. Yeltsin disbanded parliament and called for new elections in December, said Edward Laux, head trader at Kidder, Peabody & Co. Mr. Yeltsin's move capped a long-standing dispute with hard-liners who oppose attempts to reform the post-Soviet economy.

At one point yesterday afternoon, the Dow Jones industrial average had plunged 67.90 points, to 3,507.90. It closed at 3537.24, down 38.56, the biggest single-day drop since April 2.

The New York Stock Exchange's "uptick rule" was triggered for the first time since April 2 as computer-guided sell orders hit the market in midafternoon and as economy-sensitive issues such as Caterpillar Inc., Aluminum Co. of America and AlliedSignal Inc. led the average lower.

The "uptick rule" invokes certain restrictions on computerized trading when the Dow index drops more than 50 points during a session. The restrictions were implemented after the 1987 stock market crash.

The Standard & Poor's 500 index fell 2.09 yesterday, to 452.96, led by declines in bank, utility, food and chemical stocks.

The Nasdaq Combined Composite Index skidded 6.65, to 733.56, driven by MCI Communications Corp.,Willamette Industries Inc. and McCaw Cellular Communications.

Declining common stocks outnumbered advancers on the New York Stock Exchange by 3-to-1 as stocks fell for the fifth time in six sessions. Volume was active as more than 300 million shares changed hands.

Turmoil in Russia and an unexpectedly large drop in Japanese interest rates combined to drive up precious metals prices, fueling concern about inflation. Gold surged $9.50 an ounce, to $365.

"Russia has been one of the main supplier of metals," said Thomas Gallagher, head trader at Oppenheimer & Co. "You take them out of the market, and the inflationary aspect is up again."

Investors "are looking at what happened in the former Yugoslavia and what happened in 1991 when [former Soviet President Mikhail S.] Gorbachev was in trouble," said Philip Tasho, managing director at Riggs Investment Management Corp. in Washington, who manages $300 million.

"Any thoughts that the hard-liners might be getting back in power or that people aren't sure of who has their hands on the [nuclear] button always creates nervousness," said Mr. Laux, the Kidder Peabody head trader.

The plunge in stocks was also fueled by mounting concern about corporate profits in the wake of recent dismal forecasts from leading companies such as Nike Inc., Westinghouse Electric Corp., and Eastman Kodak Co., traders said.

The third quarter could be down significantly because of tax adjustments," said Peter DaPuzzo, senior managing director at Cantor, Fitzgerald & Co., referring to the increase to 35 percent in corporate taxes approved by Congress in August.

"There's not a great deal of confidence" in analysts' earnings forecasts, said Barry Berman, head trader at Robert W. Baird & Co. in Milwaukee.

For most of the session, investors were preoccupied with the domestic economy and a perception that interest rates were turning higher, said Thom Brown, managing director at Rutherford, Brown & Catherwood in Philadelphia.

Rising long-term interest rates lead to concern that the economic recovery will be choked off, lessening the appeal of stocks relative to fixed-income investments.

Long-term interest rates began to rise after the Commerce Department said housing starts in August rose an unexpectedly strong 7.8 percent to an annual rate of 1.323 million, above economists' forecast of 1.25 million starts.

The news helped drive the yield on the benchmark 30-year Treasury bond to 6.13 percent, from 6.10 percent Monday.

"Interest rates are sneaking back up again." Mr. Brown said. "There's a widely held belief that low interest rates mean higher stock prices and vice versa, and that the moment you see higher interest rates, get out of stocks."

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