Market crisis knocks Dow below 8,000

Stock average falls 2.9% on roller coaster of a day

S&P, Nasdaq also decline

WorldCom, SEC order fan investors' fears further

July 23, 2002|By William Patalon III | William Patalon III,SUN STAFF

The continuing confidence crisis whipsawed stocks again yesterday, pushing the Dow Jones industrial average below the 8,000 mark for the first time since October 1998.

The Dow dropped 234.68 points, or 2.9 percent, to close at 7,784.58, the 10th decline in the past 11 days. The 30-stock blue-chip index has skidded 15 percent over the past two weeks chiefly because investors worry that WorldCom Inc. won't be the last company to reveal corporate financial fraud.

"Why has the market fallen?" asked David Citron, a partner with Wealth Management Inc. in Towson. "Markets [operate] on trust and confidence; and right now, there isn't any."

The Standard & Poor's 500 index dropped 27.91, or 3.3 percent, to 819.84. The Nasdaq composite index fell 36.53, or 2.8 percent, to end the day at 1,282.62.

The New York Stock Exchange had its fifth-busiest day ever, with 2.27 billion shares trading, the exchange said. The record trading day was June 28, when 2.673 billion shares changed hands, according to the Big Board.

Stocks were on a roller coaster during the day. The Dow was up more than 80 points in the morning, dropped, then rallied to sell off again at the end of the day.

Although WorldCom Inc.'s bankruptcy-protection filing Sunday night wasn't the direct catalyst of yesterday's sell-off, analysts said it stoked smoldering fears of further financial scandals arising out of formerly admired U.S. companies.

"In this kind of market, [corporations] have to be more virtuous than Caesar's wife," said Gil Knight, a principal with Allied Investment Advisors in Baltimore and a portfolio manager who runs the firm's Ark Small Cap mutual fund.

SEC order a concern

Fanning the fears is a new Securities and Exchange Commission order requiring the chief executives and chief financial officers of the nation's top 945 corporations to personally certify the accuracy of their company's financial statements.

The worry: The SEC order will ignite an explosion of earnings restatements around its Aug. 14 deadline, sweeping away the last shred of investor confidence and shoving stocks into a death spin that tips the economy into a so-called double-dip recession.

"This has really taken on a mind of its own," said James Hardesty, president of Hardesty Capital Management in Baltimore. "This accounting thing [has investors thinking] if there's any smoke, there's got to be fire" at a company where massaged earnings are even suspected.

With profits still not growing, companies are not investing in their businesses, meaning consumer spending is all that's pushing the economy forward. If the bear market in stocks causes consumer confidence to nose-dive, that spending will dry up, swatting the economy back into the recession it just emerged from, some experts say.

That doesn't have to happen, other experts say. The economy is still growing - albeit slowly - and there's evidently enough consumer confidence to keep the U.S. housing market strong. Interest rates are at 40-year lows, and because inflation is not a threat, the Federal Reserve can afford to leave those rates alone long enough for the economy to get its footing, economists say.

"I don't think we're in for the most dire of circumstances," said Richard Yamarone, chief economist for Argus Research Co. in New York City. "It's just a disconnect between the economy and the stock market ... the economy's fundamentals are still very stable."

A trend predictor

But other investors say stock prices presage economic trends, meaning the sell-off is a troubling sign of what's to come. Stocks became tremendously overvalued in the market frenzy of 1999 and early 2000 and needed to be driven down to their fair value. Sometimes, stocks get pushed down too far, which is a danger here, experts say.

A bear market as strong as the one the nation is in typically - but not always - ends with a single, explosive sell-off that signals the "capitulation," or surrender, of most investors.

That happened in 1998 but hasn't now, experts say. That could mean either there's a big sell-off to come, or this downward spiral will end differently, perhaps with a series of sell-offs like those of the past several weeks.

"People are looking for complete capitulation," Joseph C. Cirelli, financial consultant with Salomon Smith Barney in Baltimore. "I've seen no evidence that we've [necessarily] reached that point over the last week. But the market never gives you what you're looking for - that's the character of the market. This may not end with a one-day sell-off."

Without that clear signal, investors who don't buy now will probably miss the profitable start of the rebound, losing out on the strong returns of a new bull market, some professional investors say. Investors with a long time horizon - three to five years minimum - should probably be searching for bargains among the rubble.

"Eventually, investors have got to buy stocks and take the position that they're going to live with the volatility in the interim," Cirelli said. At some point, "stocks are going to be higher."

That's true, other experts say. But it's hard to decide what stocks to buy when a company's financial statements can't be trusted.

"WorldCom listed $108 billion in assets and $40 billion in debt - so why are the bonds trading at 15 to 20 cents on the dollar?" asked Wealth Management's Citron. "It's because nobody believes all the numbers."

Wire services contributed to this article.

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