Fear soaring on Wall Street
By Ben White
The Washington Post
Saturday, July 20, 2002 - 12:00 a.m. Pacific
NEW YORK — The Dow Jones industrial average plunged yesterday to its lowest level in nearly four years, and some veteran stock-market hands said the drop signaled the arrival of that moment that occurs in every bear market, in which selling feeds on selling — the mirror opposite of the psychological dynamic that drives stock prices up in a bull market.
Investors continued a sell-off that began with riskier stocks in spring and has spread to some of the nation's largest and most respected companies.
The Dow fell below the low it hit in September after the terrorist attacks, losing 390.23 points, or 4.64 percent, to finish at 8,019.26. That was the worst close for the blue-chip index since October 1998 and its seventh-largest point-drop ever.
Investors awoke to news reports of a government investigation into a Johnson & Johnson plant in Puerto Rico, helping touch off waves of selling that began with Wall Street's opening bell.
"I don't think the word 'capitulation' has been accurately used in the past few weeks," said Dan McMahon, head of block equity trading at CIBC World Markets.
"But that's what you are seeing now, when any sniff of bad news sends people running for the doors."
The other major indexes also lost ground as investors troubled by bad corporate news and continuing financial scandals ignored a week of efforts in Washington, D.C., to restore confidence.
It was the Dow's eighth losing week in the past nine, despite House and Senate passage of separate bills toughening penalties for financial wrongdoing, Federal Reserve Board Chairman Alan Greenspan's upbeat comments about the economy and White House statements reaffirming President Bush's faith in the fundamentals of the economy.
"I'm pulling my money out," said Washington, D.C. resident Floyd President, 55, on a late-afternoon cigarette break. "I just don't trust the people who are running these companies anymore."
Henry Cavanna, who oversees $6 billion for J.P. Morgan Fleming Asset Management, said, "The pain is definitely spreading.
"And it is impacting the less controversial names, the Pepsicos, the Coca-Colas, who may face certain problems but nothing terribly serious. That's the true hallmark of a bear market operating with a life and a momentum all its own."
The U.S. stock market's tumble followed sharp losses across Europe yesterday as markets in Germany, Britain and France all slipped nearly 5 percent.
By the end of the day, every one of the 30 stocks that make up the Dow had fallen. The broader S&P 500 index slid 33.80 points, or 3.8 percent, to close at 847.76. The tech-heavy Nasdaq composite index lost 37.80, or 2.79 percent, to close at 1,319.15.
McMahon, of CIBC World Markets, pointed to quick sell-offs this week of Capital One, PNC Bank and several other firms on news that in another environment might have had far milder effects.
"These are stories where ordinarily the stocks would be punished but not taken out behind the barn and shot," he said.
He and others noted that yesterday's dramatic plunge also came despite second-quarter earnings figures being released by many firms that, while far short of sensational, are in many cases meeting or slightly beating Wall Street expectations.
"Microsoft's earnings were very strong," said Timothy Stives, portfolio manager at Ashland Capital Management, which handles $2 billion for wealthy and middle-class investors.
"For them to grow revenues 10 percent in the current market, considering the low demand for personal computers and weak corporate capital spending, is phenomenal. I thought that would stem the tide. It didn't. This is just total capitulation by the retail investor."
Stives said he spoke with one customer this week who demanded that his money be taken out of stocks. "He said: 'I want out, and you can't talk me into staying. I just can't handle it anymore.' "
David Memmott, head of block equity trading at Morgan Stanley, said cash continues to pour out of mutual funds as investors digest their second-quarter statements and decide they can stomach the losses no longer. Mutual-fund companies often must sell shares in blue-chip stocks to raise cash to pay investors who are pulling out, Memmott said.
"A monthly average outflow of $6 billion is not helping this market," he said.
Some of yesterday's selling also stemmed from a significant increase in margin calls in recent days, he said. Margin calls occur when brokerage firms that have lent money to clients to buy stocks request that the client put up more money because the stock has fallen, which often forces the client to sell stocks to raise money.
"Margin calls are running at between 15 and 25 times normal," Memmott said.
The heavy volume of trading yesterday was fueled in part by technical factors, including changes in the composition of the stocks in the Standard & Poor's index that go into effect this weekend. The S&P 500, which closed below 900 Thursday for the first time in nearly five years, is replacing all seven of its stocks of foreign companies with domestic issues. As a result, mutual funds that track the index were selling and buying millions of shares yesterday.
Cavanna of J.P. Morgan Fleming Asset Management suggested that a confluence of factors could help encourage buyers to return to the stock market.
"We are dealing with a serious loss of investor confidence," he said. "And nothing will change that in the near term, not Fed action or congressional action. ... But we are setting the stage for a market based on more reasonable valuations."
Cavanna added: "I think we are in fair-value territory and may be near undervalued territory. You combine that with an eventual return of investor confidence, the lack of a double-dip recession and you have a recipe for a better future — not a meal, but a recipe."
Copyright © 2002 The Seattle Times Company
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