Record losses rattle Wall Street Inflation fear fuels Nasdaq, Dow declines

Stocks buckled Friday as panicked investors cut a swath through all sectors of the market, especially the already-battered technology stocks.<br><br>The losses hit the blue chips of the Dow Jones industrial

Monday, April 17th 2000, 12:00 am

By: News On 6

Stocks buckled Friday as panicked investors cut a swath through all sectors of the market, especially the already-battered technology stocks.

The losses hit the blue chips of the Dow Jones industrial average, the dot.coms of the Nasdaq Composite index - and everything in between.

By the closing bell on a day of near-record trading volume, both indexes had suffered their worst point drops ever and the Nasdaq closed out its worst week ever.

"Every day has been a disaster this week, and today was just a bigger disaster," said Larry Wachtel, market analyst at Prudential Securities Inc. "Investors were manic as the market went up, and now they are manic on the way down."

That old nemesis of bull markets, fear of inflation, fed the latest selling binge, an analyst said.

The Nasdaq, where the dreams of the "new economy" reside, was especially brutalized, falling 355.49 points, or 9.7 percent, and closing at 3,321.29. It shed 25.3 percent of its value this week.

This was its largest point loss ever and its second-worst drop in percentage terms, just behind the 11 percent drop in October 1987. This finished off its worst week in its 29-year history, giving up more than 1,000 points, and left it at its lowest finish since Nov. 17, 1999.

The once-popular Nasdaq is mired in a bear market, having dropped 34 percent from its high of March 10.

The Dow Jones industrial average, which had been standing firm in recent weeks as the Nasdaq declined, gave it up, too, with all 30 stocks down. The Dow fell 617.78 points, or 5.7 percent, and closed at 10,305.77, its biggest point loss ever. At its lowest point, it was down 722 points.

Not a surprise

Mr. Wachtel and other market savants are quick to point out, however, that this sell-off was anticipated, in light of the 86 percent gain in the Nasdaq last year and the 25 percent gain until this latest downturn.

"Those gains were an aberration," Mr. Wachtel said. "The Nasdaq had never risen more than 30 percent in any one year. There was no rationale for it rising so high."

Such technology bellwethers as Qualcomm Inc. and Cisco Systems Inc. were among the hardest hit. Qualcomm dropped $21.31 a share to $105.19.

Cisco dropped $4.13 a share to $57 and is down almost 30 percent from its March high.

The Standard & Poor's 500 index, a measure of the broader market, slid 83.96 points, or 5.8 percent, and closed at 1,356.55 as 87 of its 88 industry groups dropped. More than six stocks fell for every one that rose on the New York Stock Exchange.

Fort Worth-based AMR Corp., parent of American Airlines, dropped $5 to $32.50 and Irving-based Associates First Capital Corp. lost $4.37 to finish at $20.37.

The Nasdaq recorded its second-largest volume day ever, with 2.5 billion shares traded, while 1.3 billion traded on the NYSE, the seventh most.

Inflation report

The stock market was whipsawed from the opening bell by a government inflation report showing higher-than-expected price increases. The U.S. Labor Department reported that the consumer-price index, a measure of inflation at the retail level, rose 0.7 percent in March, the biggest increase in 11 months.

The core index, which excludes the volatile food and energy sectors, rose 0.4 percent, the largest increase in more than five years. The fear is that the Federal Reserve will raise short-term interest rates even more to slow the economy and keep inflation under wraps.

The Fed was already expected to raise interest rates by a quarter-percent when it meets May 16. The central bank has raised rates five times since June 30, each a quarter of a point.

Higher interest rates erode stock prices because they increase corporate borrowing cost, which cuts profits, and they ultimately slow consumer spending on homes, cars and other items.

Until Friday's downturn, many analysts thought investors were simply shifting money out of "overvalued" technology stocks into "undervalued" stocks of the Dow. In other words, they were staying invested in the market.

In fact, the Dow soared about 1,400 points from mid-March until April 10, while the Nasdaq steadily declined. But Friday's inflation report has changed all that, said Hugh Johnson, market analyst at First Albany Corp.

"Now investors are selling both old and new economy stocks," Mr. Johnson said. "They are throwing in the towel because they have reached the conclusion that ever-higher interest rates are coming."

Optimism remains

However, David Clemans, branch manager of a Charles Schwab & Co. office in North Dallas, said he thinks there is a solid core of long-term investors who aren't going to exit the market.

"Eighty percent of the people today that came through the door [on Friday] invest for the long term," he said. "They just kind of laugh about it [Friday's drop]. They are still at a level of confidence that these new economy stocks will recover."

Mr. Clemans did caution that some of his larger investors think new investors will panic if the market continues to fall and will pull money out of mutual funds, which could cause a snowball effect.

"But to completely break the back of the average investor would be very difficult," he said. "Investors are just so much more educated now."

However, the market's volatility will persuade more people to follow experts' advice and diversify their investments, he said.

"We're seeing a lot more investors receptive to that," he said.

If there is a positive side to this sell-off, it's that some of the wanton speculation may finally be squeezed out of the market. Much of the gains of the last year were fueled by momentum players and day traders, who just buy the hottest stocks - often Internet companies with no earnings and sometimes no revenue - without regard to their financial health.

"The momentum guys have gotten out now," Mr. Wachtel said. "Just a whole bevy of these short-term traders are just dumping stocks."

Risk of margin buys

James Stack, president of InvesTech Research, a market-research company based in Whitefish, Mont., said investors buying stocks with borrowed money, or on margin, are also to blame for the dramatic run-up and now the sell-off.

Since January 1999, the amount of margin debt being carried by U.S. investors has soared 60 percent to $243.49 billion, according to the New York Stock Exchange, which monitors margin debt. And more than half of that increase has occurred just since September.

"What we are seeing is a return to reality," Mr. Stack said. "Wall Street is a two-way street with some inherent risks, but expectations had gotten far ahead of reality."

The question now is what happens Monday and in the coming days. Analysts were hoping that the Dow and Nasdaq would rally during the final hour of trading Friday. Both did make slight upturns in the final half-hour, but nothing significant, and that doesn't bode well for Monday.

"It was critical that the Dow and Nasdaq show some spine in the final hour, but they didn't," Mr. Wachtel said. "That almost ensures Monday is a terrible day."

Bill Barker, market strategist at Dain Rauscher Inc. in Dallas, said that for the first time in years, he is sensing some concern on the part of investors.

"It's not panic, but it's certainly concern, and this is the first time I have seen it," he said. "It will take some time to heal after this."

Mr. Stack said that stock valuations are still high by historic norms and that he thinks only a small portion of margin debt has been washed out.

"It's premature to say we are at or near a bottom in this market," he said.