The biggest rise in wholesale prices in nine years and fresh words of warning by Federal Reserve Chairman Alan Greenspan sent stocks plunging yesterday, with the Dow Jones Industrial Average briefly dipping below 10,000 for the first time since early April.
The Dow, the most widely followed stock market barometer, tumbled 266.90 points to close at 10,019.71. Yesterday was the fourth day this week of falling prices, leaving the Dow 630 points lower since trading opened Monday.
The 5.91 percent loss was the Dow's sixth-biggest weekly percentage drop.
"The stock market is coming to grips that the Fed may need to raise interest rates to slow the economy," said Alan Levenson, chief economist for T. Rowe Price Associates Inc. in Baltimore. "The perfect 10 economy may not last forever."
Even if the Fed raises rates for the third time this year when it next meets Nov. 16, rates would be where they were a little more than a year ago, he said.
Wholesale prices up
Fears of an interest rate rise were renewed yesterday by September's 1.1 percent rise in wholesale prices.
Many analysts had expected that the Producer Price Index, which measures price changes of products before they reach the consumer, would rise 0.5 percent in September.
Some market analysts said the increase was unusually high, partly because it included an increase in prices by tobacco companies raising money to pay off lawsuit settlements.
Also contributing to yesterday's sell-off was Greenspan's caution to bankers Thursday night, in which he said investors need to be sure they haven't underestimated their risk in buying stock. He also urged banks to increase reserves or capital to weather market downturns.
"Those comments were carefully timed to coincide with a period when a market and investors are very nervous," said Alan Skrainka, chief market analyst for Edward Jones in St. Louis. "He's jaw-boning not to kill but to slow down the market. Why? To slow down this economy."
This isn't the first time that Greenspan's warnings about the surging market have led to a plunge in prices.
The Fed chairman's comments the night of Dec. 5, 1996, about "irrational exuberance" in the markets sent the Dow tumbling 188 points in the first half-hour of trading the next day before climbing back about 100 points, said Steve Guo, senior quantitative analyst for Birinyi and Associates, a research and money management firm in Westport, Conn. Guo said he expects the market to rebound again in the wake of the Fed chairman's remarks. The market has soared 57 percent since Greenspan's 1996 comments.
Yesterday was nearly a carbon copy of that day in December 1996.
The Dow fell 241 points in the first 30 minutes of trading. After a weak rally, the Dow hit 9,998.18 shortly after 3 p.m., the first time since April 7 it had fallen below 10,000. The last time it closed below 10,000 was April 6.
The Dow is 11.5 percent below its high of 11,326.04 of Aug. 25.
This would be the market's 109th dip of 10 percent or more, Skrainka said. On average, the market experiences a 10 percent decline once a year, and the chance that it will turn into a bear market, a decline of 20 percent or more, is one in four, he said.
"The odds are against it developing into a 20 percent bear market. The economy is strong and inflation is low," Skrainka said. "If history is any guide, 10 percent corrections are a buying opportunity."
Others said the plunge should not come as a surprise in a bull market full of fears of higher interest rates and lower profits.
"Prices go up to the fair value and beyond, and then they come down to fair value and below," said James Grant, editor of the publication Grant's Interest Rate Observer in New York.
"What is shocking to many investors in 1999 is that this ancient rhythm should persist. The idea has been deeply [embedded] that we have moved beyond cycles."
One reason for the shock may be that the economy has been expanding for about nine years. Many investors have never experienced a bear market or prolonged decline.
Some market experts are optimistic, saying the economy is sound and inflation is not in sight.
Charlie Brooks, director of equity research for Mercantile Safe Deposit & Trust in Baltimore, said that the market as a whole may have a more difficult time but that "individual companies might do quite well."
Some investors were also optimistic, buying rather than selling. Guo said his firm snatched up technology and financial stocks. Skrainka said his firm is taking orders for blue chip stocks.
The sellers, Skrainka said, were professional investors.
"Sixty-five-year-old retired investors have more patience than 28-year-old portfolio managers," he said.