U.S. investors dump stocks, prices plunge

Negative news includes terror warnings, oil cost

August 06, 2004|By Jamie Smith Hopkins and William Patalon III | Jamie Smith Hopkins and William Patalon III,SUN STAFF

Jittery investors sold stocks heavily yesterday in reaction to record oil prices and other negative indicators, pushing two major market indexes to lows for the year.

Crude-oil futures set a record high yesterday in New York, hitting $44.41 a barrel, as tax-related problems continued to mount for the Russian energy giant OAO Yukos Oil Co.

A potent mix of other dour information - from new terrorism warnings to unexpectedly weak consumer spending and job creation in June - also cast a pall.

The Dow Jones industrial average sank 163.48 points to close at 9,963.03, under the psychologically important 10,000 mark. The Standard & Poor's 500 index dropped 17.93 points to 1,080.70, a low for 2004. And the Nasdaq composite index also hit a yearly low, shedding 33.43 points to end at 1,821.63.

"There's just a lot of nervousness out there right now," said David Straus, senior portfolio manager with the Washington-based Johnston Lemon Asset Management Inc. "Nobody wants to step up and buy, so there's nobody to come in and support the markets."

Investors were also loath to stick out their necks - and dollars - yesterday because July job creation numbers are to be released today, and the Federal Reserve will meet Tuesday to decide whether to raise interest rates, he said.

About 1.4 billion shares changed hands yesterday on the New York Stock Exchange, compared with a daily average of nearly 1.5 billion for the year.

Selling was "across the board," said Richard E. Cripps, chief market strategist at Legg Mason Inc. in Baltimore. More than eight stocks fell for every three that rose on the New York Stock Exchange, according to Bloomberg.

"And it's just indicating that oil's at a price where it's at a real tipping point for the economy and corporate earnings," Cripps said.

Investors see that economic growth is slowing and they're trying to figure out where it will settle, he said.

"I think what the markets are going through is a normal correction," he said, because stocks began rising strongly in March 2003. "We are starting to see signs that we're getting sufficiently oversold that the worst of this may be over.

"Saying that, if oil prices go up to $50 [today], we're going to go down big."

The summer is typically a slow time for the stock market, said Gregory Barnhill, a partner with Brown Investment Advisory & Trust Co. in Baltimore. Uncertainty isn't helping, he said, from geopolitical instability to the neck-and-neck presidential election.

"When you shake it all up, you end up with a general malaise over the market," Barnhill said.

Dawn McLaren, a research economist with Arizona State University's Bank One Economic Outlook Center, doubts any of these concerns will convince the Federal Reserve to hold its key interest rate at 1.25 percent.

She anticipates a modest quarter-of-a-percentage-point increase as the Fed continues its effort to keep inflation in check.

"I don't think there's any way of avoiding it," said McLaren. "Since we've already built a quarter-percentage-point rise into our expectations, there's no reason not to do it. ... I think even the stock market is expecting that."

Straus agrees, but he isn't betting on a sharp upturn anytime soon for stocks. He thinks the market is "probably bumping along the bottom" and will continue to do so for a while.

He said he has noticed that investors are turning on a dime as relatively small sell-offs on individual stocks quickly snowball into routs.

Companies have been reporting strong earnings - the S&P 500 turned in 20 percent growth in profits for the past four quarters in a row, he said. Analysts don't expect businesses can sustain that high level the rest of the year, and as oil prices continue to rise, investors get even more wary.

"It really lessens the optimism for the economy going forward because it acts as a big tax increase on us, in effect," Straus said.

But Barnhill, who's upbeat about the economy in the long term, thinks share prices have been beaten down too far and investors will realize that, perhaps as soon as September.

Jonathan Murray, a senior vice president of investments and financial adviser with Legg Mason, also sees a silver lining in the sell-off.

"As a value investor, I'm finally excited about some of the opportunities that are finally beginning to present themselves," he said.

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