Stocks plunge to lows for year

Dow falls below 10,000

fears about rising rates, news from Iraq blamed

May 11, 2004|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

Stocks plunged yesterday to their lowest levels this year as more investors rushed to join a worldwide selling spree, sending the Dow Jones industrial average below the psychologically important 10,000 mark for the first time in five months.

Some analysts said the drop was fueled by fear that strong job growth reported Friday will push the Federal Reserve to raise interest rates soon. Others said investors are being scared off by increasingly bad news about the U.S. involvement in Iraq.

Clearly, stockholders are jittery about the future despite a growing economy and robust corporate earnings, factors Wall Street usually finds favorable.

That favorable outlook is spooking investors, who fear that companies will be hard pressed to match the pace, especially as the Fed pushes rates higher. Although such increases have long been expected, last week's upbeat employment report made it likely that the Fed would push up its timetable, possibly to as early as next month.

Yesterday, all major indexes tumbled. The blue-chip Dow index closed at 9,990.02, down 127.32 points, or 1.26 percent, its first close below 10,000 since Dec. 10. The Nasdaq composite index shed 1.14 percent to finish at 1,896.07, down 21.89 points. The Standard & Poor's 500 index settled at 1,087.12, a decline of 11.58 points or 1.05 percent.

Trading was heavy, with about 1.9 billion shares changing hands on the New York Stock Exchange, 15 percent more than on Friday.

Foreign stocks fell even more. Losses ranged from nearly 5 percent in Japan to more than 2 percent on major European markets.

Gus Faucher, a senior economist at in West Chester, Pa., thinks the expectation of higher interest rates is to blame for the market's swoon because such a boost - to keep inflation down as the economy roars - would raise costs for companies and rein in growth.

"What we're seeing in the stock market is not at all tied to what's going on in the economy. It's about interest rates," Faucher said.

Recent economic news has been rosy, but investors think only bad news lies ahead, particularly interest rate increases and less-impressive earnings, said David Straus, senior portfolio manager with Washington-based Johnston Lemon Asset Management Inc. Oil prices near $40 a barrel don't help.

"We've had three quarters in a row of incredible earnings growth ... but now comparisons are going to get tougher, so you're going to see that start to trail off," he said.

Yesterday's losses leave the Dow down nearly 7 percent since its high for the year of 10,737.7 in February, The S&P 500 has dropped about 6 percent since its peak for the year in February, and the Nasdaq has lost almost 12 percent since its high this year in January.

Analysts disagreed yesterday about whether stocks have hit bottom or there's more to come.

"The markets don't like uncertainty, and unfortunately we're having to deal with a lot of uncertainty right now," said Meg VanDeWeghe, executive in residence at the University of Maryland's Robert H. Smith School of Business and a former managing director at J.P. Morgan.

"I think the most important factor that's affecting the market now is fear of some sort of terrorist activity. I think that's become worse in the last week because of everything we've been hearing out of Iraq."

Charles Lieberman, chief investment officer for Advisors Financial Center in New Jersey, said the setbacks of the past few weeks have spurred selling by investors haunted by losses in three years of a down market.

"Some investors who remember what happened when the market melted after 2000 are just jumping ship because they have very little tolerance for pain," he said. "It's driven by emotion, not sound analysis."

Because of that, he thinks the downturn is nearing an end.

Larry Puglia, lead portfolio manager on T. Rowe Price Associates' blue-chip growth fund, is generally upbeat despite the "unnerving" news about interest rates and oil prices.

"I think it's unreasonable to assume that we could have a fairly strong economic recovery without some pickup in inflation and interest rates," he said.

Straus expects stocks to bottom out then rally in the short term, particularly if earnings continue to grow as expected.

"It's not as if this is a real difficult time," he said. "It's just that compared to the 30 percent gains over the last 12 months, it looks not quite as good."

Andrew Hodge, group managing director for U.S. and Canadian economics at Global Insight, a financial and economic forecasting firm based in Massachusetts, is less bullish. He said the economy's "profit sweet spot" has lasted more than a year, driven by good sales and little job growth, but that companies have reached the point where they need to hire.

"For now, the stock market's going to have to digest both the bad interest-rate outlook and a slowing profits outlook," he said.

Jim Hartman, first vice president of investments at Legg Mason, figures that the "easy money" in the market was made in the past 12 months and that the rest of the year will be more challenging. But he doesn't foresee a new bear market.

"You may see a lot of sideways trading - rallies and pullbacks, rallies and pullbacks," he said. "In the end, we'll probably have a decent year."

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