Technology stocks take a dive

Nasdaq falls 229.46, its biggest point drop

Dow plummets 359.58

More volatility expected

Interest rate fears, delayed profit-taking blamed for decline

January 05, 2000|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Fears of rising interest rates and profit-taking sent major stock indexes plunging yesterday, with the Nasdaq suffering its largest point drop ever.

The market often dips in early January, when investors take profits. But yesterday's deep decline raised some eyebrows.

"A little hit comes when you least expect it," said Andrew M. Brooks, head of equities trading for T. Rowe Price Associates Inc. in Baltimore.

"We had a pretty strong December, and where you see the weakness today is in some sectors that have done very well last year," Brooks added.

The weakness was felt in the high-flying technology and telecommunications stocks that comprise much of the Nasdaq. Those stocks have been driving the market, sometimes masking softness in other sectors.

The Nasdaq yesterday fell a record 229.46 points to 3,901.69, a 5.6 percent drop. The previous record one-day drop was 140.43, or 5.55 percent, on Aug. 31, 1998.

On Monday, the Nasdaq closed at a record 4,131.15.

The Dow Jones industrial average was off 359.58 points, or 3.17 percent. It was Dow's fifth-largest point drop and the first time since Dec. 1 that the blue-chip index slipped below 11,000.

Standard & Poor's 500 Index, a broader measure of the market, dropped 55.80 points, or 3.83 percent, to close at 1,399.42.

"I don't think people are panicking," said Mark Babka, a senior analyst with Conseco Capital Management in Carmel, Ind.

Babka and other market watchers said some of the sell-off was from investors who had waited until the new year to sell stocks that had big gains. By doing so, they will put off capital gains taxes until april 2001 -- instead of this tax season.

"A lot of investors have stayed in stocks so they wouldn't have to pay capital gains taxes" for another year, said Robert Sweet, chief economist of Allied Investment Advisors in Baltimore. "Now they're taking some gains."

Stocks trading on the Nasdaq, which rose a record 85.59 percent last year, were likely candidates to be sold, experts said.

"If you want to take profits, that's certainly the place to look," said Arun Kumar, senior equity strategist with Lehman Brothers in New York.

Just five days ago, the three major market indexes had ended 1999 at record levels.

On Monday, the first day of trading in the year, the Nasdaq rallied as Y2K computer bug fears subsided. But those fears were replaced with new ones.

Investors worried that the Federal Reserve would try to rein in the strong economy with a series of interest rate increases this year. That caused these investors to dump bonds and push bond yields up.

Those interest-rate worries were inflamed yesterday when Warburg Dillon Read said in a research report that the Fed would likely raise short-term interest rates by one percentage point in 2000. That would be more stringent action than previously forecast.

Greenspan's nomination yesterday for a fourth term by President Clinton could make interest rate increases more likely, some predict. Greenspan, a tenacious inflation fighter, has used higher rates to cool the hot U.S. economy and temper upward pressure on prices.

"Now it's made it possible for the Fed in February to make an interest-rate adjustment," said Pradeep Ganguly, director of the Office of Business & Economic Research within the Maryland Department of Business & Economic Development.

Interest-rate sensitive stocks, such as financial services, took a hit yesterday as a result.

Sweet said that the 30-year bond was yielding 6.6 percent -- making it an attractive investment to investors who are averse to the risky, and richly valued, technology stocks. If that yield gets up to 7 percent, more investors, content with the gains they have, could flee stocks for bonds, he said.

The higher yields already may have tempted some investors, who pulled money out of stocks and into bonds, said David Straus, a senior portfolio manager for J. L. Capital Management Inc. in Washington. "At some point [bonds] offer competition to stocks," he said.

"In my opinion, we are going to have difficult times ahead," said Ricky Harrington, technical analyst and senior vice president at Wachovia Securities. "This is the beginning."

"We're wondering if this is not the beginning of a standard correction," said Pierre Ellis, senior economist at Primark Decision Economics. "There has been a big advance and the interest-rate outlook has deteriorated. There seems to be more and more of a perception that the Federal Reserve will have to do a significant number of tightenings this year."

Conseco's Babka said investors who are pulling out of the market now may sit out on the sidelines and jump back in when stocks are more affordable.

Lehman's Kumar said the market may be headed into a correction, similar to the one last summer when the Fed was gearing up for rate increases. Still, he is optimistic for 2000.

"We're still looking for double digit returns in the year 2000," he said.

Sun staff writer William Patalon III and Reuters contributed to this article.

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