A raft of bad news sent the stock market tumbling yesterday amid worries that the economy is slowing, corporate profits are sagging and problems in Asia, Russia and Latin America are continuing to fester.
Industry analysts also said that mutual fund managers scrambled to reshuffle their portfolios by dumping losing stocks to improve their performance, and that the market is still spooked by fears that the banking industry's problems could worsen.
Investors were disappointed in the Federal Reserve's decision Tuesday to cut rates by just a quarter of a point to boost the economy, experts said.
The Dow Jones industrial average fell 237.90 points, or 2.94 percent, to 7,842.62, its largest loss since a 249-point drop on Sept. 10. It was the eighth biggest point drop in the history of the bellwether index, but not close to a record in percentage terms.
While stocks sank, bonds surged, pushing the Treasury's benchmark 30-year bond up more than 2 points, and sending its yield to a record low of 4.96 percent. The average 30-year fixed mortgage fell to 6.60 percent.
"It was a pretty screwy day," said Andrew Brooks, head trader at T. Rowe Price Associates Inc., the Baltimore-based mutual fund company. "There were a lot of cross currents."
Investors had both good and bad news to weigh:
The Commerce Department said sales of single family homes fell 4.4 percent in August for the second month in a row, signaling that the economy could be slowing.
More than $11 billion flowed out of U.S. stock funds in August, according to the Investment Company Institute, a Washington-based mutual fund trade group.
However, the index of leading economic indicators, considered a key barometer of the economy's future direction, was unchanged in August. Economists said that it signaled continued growth into next year, although slower from prior months.
The turmoil on Wall Street came a day after Federal Reserve policy makers cut interest rates, a move expected by investors.
Joseph V. Battipaglia, chief investment strategist at Gruntal & Co. LLC in New York, said traders pushed the stock market higher in recent days on expectations that the Fed would cut rates. When it happened, they sold stocks yesterday, prompting large pension funds and mutual funds to follow suit, and the market dropped.
He said mutual fund managers also caused the market to drop by reshuffling their portfolios -- buying and selling stocks -- so they could beat benchmarks and beef up their performance for investors.
"They had their way with the market all day," he said.
James Hardesty, president of Hardesty Capital Management, a Baltimore-based money management firm, said investors wanted a bigger rate cut. "There has been a bit of a letdown," he said.
Other experts said investors are still worried that large banks could suffer heavy losses to hedge funds that invested in foreign markets. Greenwich, Conn.-based Long-Term Capital Management L.P. borrowed billions from many large U.S. banks, and it required a $3.6 billion bailout.
"It seems too easy to have a problem we didn't know about at all two weeks ago and suddenly announce it solved," Hardesty said. "The enormity of the problem causes one to wonder if the solution could be so simple."
The major U.S. stock market indexes fell yesterday, including the broader Standard & Poor's 500 index, which lost 31.97 points, or 3.05 percent, to 1,017.05. The Nasdaq composite index, home to many high-technology firms, slipped 40.21 points, or 2.32 percent, to 1,693.84.
Trading in New York Stock Exchange-listed stocks was heavy, with 962.4 million shares changing hands, up from 892.78 million Tuesday. For every five stocks on the Big Board that rose, eight fell.
Sung Won Sohn, chief economies at Minneapolis-based Norwest Corp., expects more bumps for the stock market, especially since third-quarter profits for the 500 companies making up the S&P; 500 are expected to be weak.
"I think clearly we [the economy] are vulnerable because the stock market is overvalued and prices have dipped, but earnings expectations have declined even faster," he said.
Sohn said the Fed's interest rate cut "reinforced the view that economic growth is indeed slowing, and the global financial crisis is not going to be over anytime soon."
"I think the worries are all around us," he said.
Gruntal's Battipaglia is more bullish. He said expectations that profit gains of the country's largest companies will come in below 1 percent will be "proven wrong."
He said they could rise by as much as 4 percent in the quarter, which ended yesterday. "That would be very good," he said.
Pub Date: 10/01/98