P&G drives Dow into tailspin

Index plunges 375 as company warns earnings will fall short

'Like a bomb hit it'

Loss is 4th-biggest in terms of points

Nasdaq suffers less

March 08, 2000|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

The Dow Jones industrial average plunged nearly 375 points yesterday, its fourth-biggest point loss ever, after Procter & Gamble's warning of disappointing earnings rattled investors' confidence in blue-chip companies.

"It looks like a bomb hit it," said Robert Mewshaw, president of the investment firm Van Sant & Mewshaw in Lutherville.

The jitters spread to the Nasdaq, which had temporarily soared past 5,000 for the first time before heading down.

At one point, the Dow, made up of 30-blue chip stocks, had fallen more than 400 points. It closed down 374.47 points at 9,796.03, a 3.68 percent drop.

Procter & Gamble, the maker of Tide, Pampers and other consumer products, accounted for a large share of the drop, 136 points. The company's cosmetics and fragrances division is based in Hunt Valley.

Procter & Gamble had warned Wall Street analysts that its earnings this year would be below expectations because of competition in Latin America and higher costs for manufacturing and raw materials.

The company said its fiscal third-quarter earnings would be 10 percent to 11 percent lower than they were in the same period a year ago. It had predicted an increase of 7 percent to 9 percent.

The Cincinnati-based company's stock skidded $26.4375, to $61, a 30.2 percent plunge that erased more than $35 billion in market value. It was also the most active U.S. stock, with 68.6 million shares trading.

Procter & Gamble's announcement "was surprising to us, and we were not the only ones surprised," said Howard Kornblue, a money manager for Phoenix-based Pilgrim Funds, which oversees $18 billion. Kornblue's portfolio includes 50,000 Procter & Gamble shares, which he plans to sell.

The Dow average, composed largely of consumer, industrial and financial-services stocks, was also hurt by concern that higher interest rates might erode corporate profits. Federal Reserve Chairman Alan Greenspan reaffirmed yesterday that the central bank will keep raising interest rates until the economy slows.

"There is the expectation that higher rates will slow the economy and particularly impact the so-called `old economy' companies," said Joseph Stocke, who manages about $800 million at Stoneridge Investment Partners LLC in Malvern, Pa.

Message on rates

"Yesterday's message was that the Fed will raise rates as they feel necessary to control growth and keep it at a sustainable pace without inflation."

Merrill Lynch downgraded the entire consumer-products sector.

Investors have been worried about earnings at blue chip and industrial companies. First-quarter earnings reports are to be released next month.

Procter & Gamble's announcement confirmed fears that other companies might be struggling against pressures on their profit margins and might have difficulty raising prices, analysts said.

"For those extremely bullish on the stock market, one of the pillars is that profit margins will be sustainable, if not expanded. This sent a shot across the bow that the assumption needs to be revisited," said Richard Cripps, chief market analyst with Legg Mason Wood Walker Inc. in Baltimore.

It didn't take long for the effect of the Procter & Gamble announcement to rub off on other consumer-products companies and then spread to other sectors. Coca-Cola and Gillette Co. hit 52-week lows.

Technology stocks also suffered, but not as much. They are often considered immune to rising interest rates and wage pressures compared with "old economy" stocks.

The Nasdaq composite index, heavily weighted with technology companies, dropped 57.01 points to 4,847.84, wiping out a 102-point gain that had pushed it above 5,000 for the first time. A little more than two months ago, the Nasdaq closed over 4,000 for the first time.

"The market was not selective," said Andrew Brooks, head of equity trading at T. Rowe Price Associates Inc. in Baltimore.

Yesterday's volatile market might have raised eyebrows but was more of the same, some said.

Continued `correction'

"It was a continuation of the correction that began in January," which was interrupted last week by a short-lived rally, said Richard McCabe, chief market strategist for Merrill Lynch.

The Dow's drop yesterday raises the question of when investors will stop buying the hot technology stocks and move money into underperforming blue chips, Brooks said.

Now is the time for such a move, said Alan Skrainka, chief market analyst with Edward Jones in St. Louis. "It's a wonderful buying opportunity," he said.

Skrainka said he disagrees with those who say the only stocks to buy these days are the "new economy" technology stocks. "That assumes we are all sitting in the dark, naked, cold and hungry, surfing the Internet," Skrainka said.

Investors should consider old economy companies, such as those in consumer products, health care, financial services and retailing, he said.

If investors had bought such stocks when they were out of favor in 1993 and 1994 and held on to them, they would have made a 100 percent return on their money in a couple of years, Skrainka said.

Wire services contributed to this article.

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