Economy's red flags bring out the bears

Worried investors drive Dow average down 295

September 28, 2002|By Julie Bell | Julie Bell,SUN STAFF

Investors, spooked by another round of corporate earnings woes and a host of lingering worries, dumped stocks yesterday, pushing the Dow Jones industrial average down 3.7 percent and giving back most of the previous two days' gains.

The sell-off came after at least four large companies were the subject of profit warnings and a Commerce Department report confirmed that the economy had slowed greatly in the spring.

The Dow fell 295.67 points to close at 7,701.45. The drop all but erased the average's 314-point gain over the previous two sessions. It also pushed the blue chips close to their four-year low of 7,683.13, reached Tuesday.

Broader stock indicators also finished lower. The Nasdaq composite index fell 22.45, or 1.8 percent, to 1,199.16. The Standard & Poor's 500 index fell 27.58, or 3.2 percent, to 827.37.

Market analysts said investors were left wondering if widespread earnings problems would continue after warnings of lower profits at Philip Morris Cos. Inc. and Wyeth, Delta Air Lines Inc.'s projection of a bigger-than-expected quarterly loss and two analysts' downgrades of General Electric Co.'s shares because of profit concerns.

"So many companies are telling us earnings are going to be below forecast; so many companies are telling us earnings are bunk," said Hugh A. Johnson, chief investment officer at First Albany Corp. "It's hard to make the case that the earnings recession ended in the third quarter - or will end anytime soon."

The three major market gauges all finished lower for a fifth-straight week, a distinction not seen since May 24 to June 21.

For the week, the Dow lost 3.6 percent, the Nasdaq declined 1.8 percent, and the S&P fell 2.1 percent.

More pessimism

The sell-off had traders and analysts talking about increasing pessimism among investors, who can't seem to find a good reason to buy.

"I don't see where the market's going to get over its nervousness anytime soon," said John R. Boo, head of Nasdaq trading at Ferris Baker Watts Inc. in Baltimore. "People have a lot of things to worry about, and they can conjure up any number of new ones if they require them."

The Commerce Department's final report on second-quarter gross domestic product showed that the nation's economy grew at a 1.3 percent annual rate. The rate was revised upward from an earlier estimate of 1.1 percent but was far below the 5 percent reported for the first quarter.

The slightly better economic news, however, was undercut by yesterday's announcements of layoffs at SBC Communications, which is cutting 11,000 jobs, and Delta, which said it will eliminate 1,500 flight-attendant jobs.

Investors might also be jittery about a possible war with Iraq, concerned about terrorism and skeptical that corporations are accurately reporting their earnings in the wake of numerous accounting scandals, said David DeRosa, president of DeRosa Research and Trading in New Canaan, Conn.

Discouraged buyers

What's more, investors who have been trying to buy undervalued stocks after previous sell-offs might be discouraged by now, contributing to an atmosphere in which sellers vastly outnumber buyers.

"If you've been trying to pick the bottom, you've been wrong so far," Boo said. "You've been burned" as the market continued to fall.

But the biggest reason for the downturn appeared to be the signal sent by yesterday's corporate earnings warnings.

"These earnings disappointments in such blue-chip, large-cap stocks really signify that the recovery is muted," said Andrew M. Brooks, head of equity trading at T. Rowe Price Group Inc. "It's going to take a little longer, and expectations have to be adjusted."

Mario DeRose, a market strategist with Edward Jones in St. Louis., said the market may turn if investors see improved earnings from other corporations, which are about to report third-quarter results.

"Certainly, if you start seeing better earnings news, you get investors feeling better, anyway," DeRose said.

"It's hard to say what the catalyst is going to be to turn the numbers around."

The Associated Press and Bloomberg News contributed to this report.

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