Stocks plummet amid rising fears

Nasdaq index closes below 2,000 for first time since Dec. 1998

`It's a confidence crisis'

Technology issues, profits cause concern

Dow, S&P also tumble

March 13, 2001|By William Patalon III | William Patalon III,SUN STAFF

Stocks nose-dived again yesterday - and the Nasdaq composite index closed below 2,000 for the first time in more than two years - as profit fears and worries about the slowing U.S. economy have transformed stock market gloom into bear market despair.

The technology-laden Nasdaq dropped for a third straight day, this time plunging 129.4 points, or 6.3 percent, to its first close below 2,000 since December 1998. The index, which a year ago was the darling of investors, is down 62 percent beneath its record close of 5,048.62 on March 10 last year.

Investor melancholy wasn't limited to the high-tech sector. The Standard & Poor's 500 index dropped 53.26 points, or 4.3 percent, to end the day at 1,180.16. That's 23 percent below the record it set in March last year, more than the 20 percent most analysts say is needed to label it a bear market. Of the 500 stocks in that index, 469 fell yesterday.

The Dow Jones industrial average dropped more than 436 points, or 4.1 percent, to close at 10,208.25.

Key catalysts have exacerbated the carnage. Profit warnings from tech-sector giants - such as Thursday's from chip-maker Intel Corp. and Friday's from networking leader Cisco Systems Inc. - have helped savage stock prices.

So have worries about the directionless Japanese economy and a fear that the Federal Reserve isn't cutting interest rates fast enough to keep the U.S. economic slowdown from turning into something far worse.

Investor psychology - a significant factor in the financial markets - is playing an increasing role, too, some analysts say. Though the U.S. economy is clearly in a slowdown, it's not in a recession, experts in this group say. But that's not the message the stock market is sending.

"It's not an economic crisis, it's a confidence crisis," said Alfred Goldman, chief market strategist for A.G. Edwards in St. Louis.

That confidence crisis has a clear impetus: companies such as Cisco - the biggest maker of the networking gear that serves as the backbone of the Internet - that were once perceived as invincible are becoming mortal. Late Friday, Cisco said it would eliminate up to 8,000 jobs, some through firings, to cut costs amid a spending slowdown by customers throughout the world.

During the market mania of 1999, when the Nasdaq advanced 86 percent, and again early last year, investors bid the stocks of "new economy" companies up to unsustainable levels, experts say.

Such manias, also known as speculative bubbles, typically end with sell-offs as drastic as the bull markets that rallied shares to records in the first place.

"Investors are driving the market down with as much energy as they drove it up," said Anthony B. Perkins, editor in chief of Red Herring technology magazine and co-author of "The Internet Bubble: Inside the Overvalued World of High-Tech Stocks, and What You Need to Know to Avoid the Coming Shakeout."

There might well be more to come, some experts say. Despite the selling, investors remain too confident for their own good, said Robert Shiller, the Yale University economist whose book "Irrational Exuberance" warned investors that stocks might be overvalued.

"The market's come a long way down, but it's still too high," he said. "I see it going down from here."

The prospect of a prolonged bear market is causing much angst among some analysts. In recent years, as more U.S. households gained stakes in the stock market, consumer confidence has increasingly risen and fallen in step with stock prices.

As the bull market soared in 1999 and early last year, the economy roared along with it, thanks to the "wealth effect." Climbing stock prices induced increasingly confident consumers to spend more and more, supercharging economic growth.

But such rampant growth can eventually cause economic shortages and inflation. Federal Reserve Chairman Alan Greenspan's focus on climbing stock prices and the wealth effect was real enough to induce the central bank to boost interest rates six times between June 1999 and May 2000 in hopes of slowing growth enough to keep that inflation from taking hold.

But late last year, with stocks in a steep decline, once-hot Internet companies imploding and a disputed presidential election causing significant economic uncertainty, consumer spending seemed to slow so sharply that serious recession talk surfaced for the first time in nearly a decade.

As stocks continued their descent, some economists worried openly about a "reverse wealth effect," in which declining stock prices could cause a confidence crisis so severe that consumers would zip shut their pocketbooks. That could cause the U.S. economy to seize up and create the first recession since the 1990-1991.

"That's the bears' case," said Joseph Cirelli, a financial consultant and broker with the downtown office of Salomon Smith Barney.

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