Stock indexes take a beating

Nasdaq down 109 amid China fears, earnings warnings

April 04, 2001|By William Patalon III | William Patalon III,SUN STAFF

The Nasdaq composite index - a key gauge of the U.S. high-technology sector that only a year ago was an investor darling - closed yesterday at its lowest point since October 1998, after profit warnings and worries about a standoff with China touched off yet another stock market sell-off.

Trading sent the Nasdaq down more than 109 points, or nearly 6.2 percent, to finish the day at 1,673 - a drop of two-thirds from the March 10, 2000, record close of 5,048.62.

"Investors are overexposed" to the riskiest stocks, said John P. Hussman, portfolio manager of the Hussman Strategic Growth Fund, a mutual fund based in Ellicott City. "They've just been slow to act on it. They want to believe that just because stocks have declined so much, they must not have further to fall. But my analogy is that if you jump out of an airplane, the distance you have left to fall isn't measured by how much you've dropped - it's measured by where the ground is."

The other key indexes suffered in kind. The Dow Jones industrial average dropped more than 292 points, or 2.99 percent, to close at 9,485.71, while the Standard & Poor's 500 index fell 39.41 points, or 3.44 percent, ending the day at 1,106.46. Only 44 of the 500 stocks on that index managed gains for the day.

"I can't pin this on any one specific event," said Charles G. Crane, strategist for Spears, Benzak, Salomon & Farrell, a division of Key Asset Management. "Certainly, there's concern about what's going on in China. But this mostly is the ongoing reports and worries about what the first quarter is going to look like."

The acrimonious stalemate between the United States and China - begun by an American spy plane and China air force fighter jet colliding in midair - already had investors feeling wary. But then profit warnings from a trio of the better-known Internet firms fueled the decline: Software makers Ariba Inc. and Inktomi Corp. and networking-gear producer Redback Networks Inc. all saw their shares sell off yesterday after disclosing that their results fell short of forecasts.

The fate of these three stocks underscores the pain investors have had to endure. Ariba, which traded as high as $168.75 in September, plunged $2.06 - or 32 percent - yesterday to close at $4.44. The maker of Internet-commerce software said it lost 20 cents a share in the quarter ended March 31, as customers slashed capital spending.

Commerce One, another e-commerce leader, saw its shares drop $2.24 to close at $5.61. Merrill Lynch & Co. analyst Christopher Shilakes cut his rating on the Ariba rival from "accumulate" to "neutral" after noting Ariba's announcement as evidence of deteriorating demand for Internet-marketplace technology. Commerce One shares topped out in September at $84.13.

Inktomi shares fell $3.43 to finish at $2.79, after the firm said capital-spending cutbacks by corporate customers could hurt its financial performance. The stock traded for $191 a share a year ago today.

That year-long decline in stocks - which plunged the S&P 500 into a bear market and has seen the Nasdaq decline by 32 percent this year alone - has eradicated more than $5.3 trillion in shareholder wealth.

"You're starting to see investors dumping their holdings and moving to cash," said Jim Herrick, head of listed trading at Robert W. Baird & Co. in Milwaukee. "It's definitely [a] day of bloodshed."

Wall Street wisdom holds that, for a bear market to end, there must be complete "capitulation," where all but the most serious of investors toss in the towel on stocks, reasoning that there won't soon be a market turnabout.

But capitulation is typically marked by a final, cataclysmic sell-off, which has yet to happen here. Instead, the bear market that's gouged the Nasdaq and S&P indexes has been marked by a resolute, drawn-out sell-off - with no one day that can really be labeled as a crash, market experts said.

History has shown that drawn-out bear markets can be much more harmful than a single-day crash because of the way they erode confidence - not just in the stock market, but in the economy, experts said. The October 1987 crash, for instance, didn't lead to a recession. In fact, the economy kept growing well into 1990, before entering the last recession the U.S. economy has seen. By contrast, the long bear market of 1973-1974 did presage a recession, the hallmarks of which were high energy prices and high inflation.

The U.S. economy is in much better shape than it was in the early '70s, said James Hardesty, president of Hardesty Capital Management in Baltimore. Hardesty said he thinks that stock prices just rose too high relative to corporate profits.

Stocks can't fall forever, Hardesty said, and ultimately will turn around, probably sooner rather than later.

Wire services contributed to this article.

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