Stocks Tumble, and the Fallout Is Going Global


By FLOYD NORRIS and DAVID E. SANGER






he United States stock market fell sharply again yesterday. Investors seemed to fear a slowdown in the world economy and shrugged off President Bush's statement that "there is value in the market" now.




The weak American market has alarmed investors abroad as well as at home. "There is a growing disenchantment with equities globally, rather than with U.S. financial assets," said Robert Barbera, the chief economist of Hoenig & Company, as stock prices slid around the world.




Until recently, there had been general agreement that the economy was growing at a moderate pace, and that there was little danger of a new recession. But yesterday's market action seemed to indicate growing doubts about that, with some of the worst performances coming from stocks — like Dow Chemical, Alcoa and United Parcel Service — whose businesses are heavily dependent on the state of the economy.




The Dow Jones industrial average, which was slightly up for the day as late as 2 p.m., ended down 234.68, or 2.9 percent, at 7,784.58, its lowest close since Oct. 8, 1998. Over the last 10 trading days — beginning with the day President Bush came to Wall Street — the Dow has fallen nearly 1,500 points, or 16 percent.




As measured by the Standard & Poor's index of 500 stocks, which yesterday fell 3.3 percent, the last 10 trading days have been the worst since 1987. That exceeds the declines seen in such previous market sell-offs as the aftermath of last September's terrorist attacks and the 1998 Asian crisis.




Mutual fund investors are doing more selling now than they did last September, some fund executives said. "Investor confidence has definitely been more shaken than it has been," said Brian Lewbart, a spokesman for the T. Rowe Price group of funds, who said some investors were moving money from stocks to bonds.




President Bush delivered a forceful defense of current stock prices, saying investors now are "buying value, as opposed to, you know, buying into a bubble." And, speaking the day after WorldCom filed the largest bankruptcy in American history, he said Congressional approval of the pending corporate responsibility legislation "will help to take some of the uncertainty out of the market."




The president also told reporters that he had "all the confidence in the world" in his much-criticized Treasury secretary, Paul H. O'Neill.




Mr. Bush's comments came during a visit to the Argonne National Laboratory in Illinois, where he reviewed new technologies for detecting and combating terrorist attacks. The comments seemed to reflect the depth of the White House concern of political fallout from the widespread criticism of Mr. Bush's economic team and the 39 percent fall in the S.& P. 500 since he took office 18 months ago.




The statements were the first instance of Mr. Bush's feeling compelled to come strongly to the defense of Mr. O'Neill, at a moment that some Republican leaders are quietly urging the administration to begin thinking about candidates who could replace Mr. O'Neill after the November elections.




"I say he's doing a fine job," Mr. Bush said yesterday. "And when the market goes up, I hope they will give him credit. If they're going to hold him accountable for a market going down, they ought to give him credit when the market goes up."




In fact, Mr. O'Neill's critics on Wall Street and in Washington have not argued that he is responsible for the market's fall. Rather, they have questioned his effectiveness in reining in the federal deficit and articulating a clear federal policy for a dollar whose value has been declining along with the stock market, and his habit of speaking his mind in ways that can rattle confidence.




Last Sept. 19, when markets were falling in the wake of the terrorist attacks, Mr. O'Neill said: "My guess is that when we look a year down the road, the people who bought today are going to be the happy people. The people who sold today will be sorry they did it." He added that he thought the Dow, which was then around 9,500, could be approaching a record high "in another 12 or 18 months."




The criticism of Mr. O'Neill for such comments made Mr. Bush's off-the-cuff statements to reporters yesterday particularly surprising. Traditionally presidents stick to talking about the fundamentals of the economy — as Mr. Bush has done repeatedly in recent weeks — while steering clear of any suggestions about how markets will act.




About 18 months into his presidency, President Clinton talked at length about fluctuations in the dollar, and was warned by his chief economic adviser at the time, Robert E. Rubin, never to do it again — because he would be blamed if the predictions went awry. Thereafter, Mr. Clinton usually heeded the suggestion.




Mr. Bush's advisers have given him the same counsel, and he has usually steered clear of all market predictions. Only last week his press secretary, Ari Fleischer, criticizing television networks for running the stock market ticker on the screen as the president spoke about the economy, noted that the factors governing when markets rise and fall are so complex that most analysts who think they understand the process do not know what they are talking about.




That did not stop Mr. Bush yesterday from speaking in terms usually heard from Wall Street strategists. "People will be buying the market based upon the value," he said. "And what's happening is corporate earnings are improving, so that the price-earnings ratios are improving. And I believe people are going to come back into the market."




Many on Wall Street agree with Mr. Bush that there is value in the market, but those messages recently have fallen on deaf ears among investors. Thomas McManus, a strategist at Banc of America Securities, pointed out yesterday morning that after last week's declines Dow Chemical had a dividend yield greater than that of a 10-year Treasury bond, something he said had never before happened. That did not stop Dow from falling $1.19, to $26.65. At that level, its annual dividend of $1.34 a share provides a yield of 5 percent, while the Treasury bond yields 4.45 percent.




The American market did seesaw during the day. After the president spoke, a rally pushed the Dow up more than 200 points and above Friday's close. But in the final two hours of trading the market fell sharply.




Most European markets suffered a worse day than the American market, with the leading indexes in Britain, Germany and France all down about 5 percent for the day.




Within the United States, the limited areas of strength were concentrated in companies whose businesses would suffer the least in a renewed recession — companies that make products like razor blades, beer and soft drinks. Gillette rose $1.23, to $29; Anheuser-Busch added $1.67, to $45.67; and Coca-Cola gained 80 cents, to $45.89.




One market indicator of expectations for the worldwide economy is the price of copper. It has fallen from 78.6 cents a pound in early June to 70.2 cents yesterday, including a decline of 1.2 cents yesterday. But it remains well above 60.6 cents, the level it hit last November when economic pessimism was at a peak.




The economic concern now centers on the question of whether the American consumer, whose buying played a major role in making last year's recession a mild one, can keep spending. "There has been a lot of debt creation," Mr. McManus said. "The economy is too dependent on the consumer."




Mr. McManus said he still thought that stocks would rise, but "people should not have a high expectation of how much money they will make by December."




One benchmark of a sort was reached when the Nasdaq composite index fell below 1,300.12, the level it was at on Dec. 5, 1996, when the Federal Reserve chairman, Alan Greenspan, delivered his celebrated "irrational exuberance" speech. That index, which was the biggest beneficiary of the bubble, fell 36.50, or 2.8 percent, to 1,282.65, and is now 74.6 percent below its peak.




The Dow remains 21 percent higher than it was when Mr. Greenspan gave that speech, while the S.& P. 500 is 10 percent higher.




Many Americans say they are dedicated to the market for the long haul, and while mutual funds have been experiencing redemptions lately, they are on a much lower scale than in 1987, when that year's collapse of prices shocked investors.




"If I was about to retire, I would be concerned," Jeff Greener, 39, a trust and estates lawyer, said yesterday as he watched the market move at a Manhattan office of Charles Schwab. "Hopefully my money will be there in 25 years."




But the faith that the market will always come back, which grew in the years after 1987, as that crash preceded a great boom, has been shaken, and people seem less willing to "buy the dips," as the phrase went.




One measure of that is what happened yesterday, after the big sell-offs on Thursday and Friday. It was the first time since 1987 that the S.& P. 500 fell at least 2 percent a day in three consecutive sessions.




In 1987, the market fell sharply for three days at the end of a week, and then plunged on the following Monday. But since then, the market rallied on Monday every time that the Dow fell 3 percent or more on a Friday. That pattern was broken yesterday.




Jay Mueller, an economist and portfolio manager at Strong Investments, a mutual fund company, said call volume to his company was running about 20 percent above normal levels, and that over the last month there had been "some movement" away from stock funds and into bond funds.




"It is not as if people are totally giving up on the stock market," he said, "but they are recalibrating their exposure."


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