By Sharon Walsh
Washington Post Staff Writer
Tuesday, October 28, 1997; Page C01

A witches' brew of events, from growing turmoil in markets in Southeast Asia to an overvalued U.S. market and fund managers trying to lock in profits, wreaked havoc on Wall Street yesterday.

"We've got a global market swoon going on here," said Bruce Steinberg, a Merrill Lynch & Co. economist, of the 7.2 percent drop in the Dow Jones industrial average, which closed at 7161.15. "Asia hit a wall. And that transmits to the rest of the world."

"It's a one-way market right now -- and that way is down," said Steve Roach, a Morgan Stanley Group Inc. economist. "We're in a mini-panic. There aren't a lot of natural forces of stability."

But economists were quick to caution that the panic was not justified by activity in global markets. "Events in Asia mean that growth is slowing, but not that it's stopping," Steinberg said. "The worry here has been that growth was too fast."

Roach, who just returned from two weeks in Asia, said the importance of events there to U.S. markets has been overblown. "The numbers show that if there's a real slump in Asia, our GDP [gross domestic product] will be off one-fourth of a [percentage] point," he said.

Some analysts have argued for months that the prices of U.S. stocks were overvalued compared with their earnings, and that the market wouldn't sustain them. After yesterday's plunge, they said that many companies' values were close to where they should be.

"The market's been overvalued all year," Roach said. "We're getting close to fair rates now, but there's nothing inherently stable about a market correction. . . . It took an event 12 time zones away to make people look at valuations."

Before the trading day began, investors were expecting a rough ride based on further downturns in other markets. But they hadn't expected quite as catastrophic a day as it turned out to be.

"Wow! Wow!" said Hugh A. Johnson, chief investment officer at First Albany Corp., as he watched the Standard & Poor's 500-stock index numbers tumble in the early afternoon. "I just don't believe that the S&P's down 64!" [The S&P 500, used as a benchmark by many money managers, ended the day off 64.65 points at 876.99.]

With the stoicism of a born market analyst, Johnson was able to look at the bright side. "Hey, things are starting to look good again. . . . When we started the day, I would have told you the market was 6.2 percent overvalued," he said. "The upside potential was a paltry 5.2 percent for the next year."

But the day's market dive improved many stocks' price-to-earnings (P/E) valuations, he said, with an upscale potential of 12.9 percent.

However, he noted wearily, "Most people aren't considering the rational calculations. They've just panicked. . . . Once they start being rational again, they'll realize this."

A sampling of stocks showed that Cisco Systems' P/E ratio of 54 just a week ago had dropped to 42; Gillette's P/E ratio had dropped from 47 to 45, Coke's from 36 to 32 and Intel's from 21 to 19.

Few were willing to guess when buyers might come back into the market. Many analysts thought mutual fund managers who were trying to lock in profits before the month's end fueled much of yesterday's selling. But those same fund managers will not want to sit on their cash for long and will come pouring back into the market when they believe it has bottomed out, they said.

"We'll digest this in the next few days," said Don Kapetanakis, senior market analyst at Merrill Lynch. "There's no serious damage to the long-term market." A lot of Merrill Lynch brokers called today asking, "At what point do we buy?" he said.

"We'll get a bounce tomorrow," said Matthew Ruane, senior vice president in charge of equities trading at Gerard Klauer Mattison. He noted that even though the market has corrected 13 percent since summer, prices are still up 36 percent over the past 18 months.

"The test will be whether the U.S. retail investor comes roaring in to buy on the dip tomorrow," said David Shulman, chief market strategist at Salomon Brothers.

While many investors will feel cheated out of their paper profits, said Roach, the drop yesterday still didn't put a dent in the market phenomenon of the past several years.

"If you put $1,000 in the market at the end of 1994, you'd still have $1,900," he said. "There was a lot of damage done today, and tomorrow won't be pretty. But breaks like this are usually followed by a pause and some reflection."

Among other indicators yesterday:

Declining issues outnumbered advancing ones by about 16 to 1 on the New York Stock Exchange. NYSE volume totaled a record 685.52 million shares, up from the 677.7 million traded Friday.

The Nasdaq composite index fell a record 115.83 to 1535.09. The NYSE composite index fell 32.56 to 463.21 and the American Stock Exchange composite index fell 40.77 to 660.41.

The 30-year Treasury bond rose $20 for each $1,000 in face value. Its yield, which moves in the opposite direction from price, fell to 6.12 percent from 6.27 percent late Friday. The yield was the lowest since it finished at 6.09 percent on Feb. 14, 1996.

In late New York trading, the dollar was quoted at 121.88 Japanese yen, up from 121.87 late Friday, and at 1.7495 German marks, down from 1.7730. [In Tokyo late Tuesday yen , the dollar was trading at 120.56 yen.]

Light sweet crude oil for December delivery settled at $21.07 a barrel, up 10 cents, on the New York Mercantile Exchange.

Gold for current delivery rose on the Commodity Exchange division of the New York Mercantile Exchange to $311.30 a troy ounce, from $307.30 on Friday.

[In Tokyo Tuesday, the Nikkei stock average of 225 issues closed the trading day down 725.67, or 4.26 percent, at 16,312.69.]