By Sharon Walsh
Washington Post Staff Writer
Friday, August 28, 1998; Page A01

NEW YORK, Aug. 27—Bad economic news ricocheted around the globe today, from Japan to Russia to Europe and then to Latin America, finally exploding in U.S. stock markets and sending the Dow Jones industrial average plunging more than 350 points to close at 8165.99. The 4.2 percent drop was the largest since October's dive of 7 percent.

Markets around the world were battered before U.S. traders were at their desks. Foremost among the concerns of analysts and economists was the massive financial disarray in Russia. The Central Bank has suspended trading of rubles for dollars, the country has stopped repaying foreign loans and the stock market has essentially evaporated.

Asked to sum up the distress in the market, Carol Stone, deputy chief economist at Nomura Securities International, replied: "Well, there's Russia, and then there's Russia, and then there's Russia."

Russia's economic crisis has been growing steadily worse since President Boris Yeltsin's government allowed the ruble to be devalued on Aug. 17. The ruble, which was trading at 6.3 to the dollar as recently as two weeks ago, was worth slightly more than half that much in street trading today, with Russia's major currency trading system shut down.

While U.S. exposure to Russia's economy is not large in terms of exports, investors and analysts expect the crisis to spread to other economies, including emerging markets and important U.S. trading partners such as Latin America, and ultimately hurt the United States.

Investors, including European bankers, who bought Russia's high-risk, short-term debt because of high returns now face the prospect of huge losses. Many of those investors were highly leveraged and are having to sell U.S. stocks to cover their foreign losses.

"Russia is basically gone as an investible area," said John L. Manley, an equities strategist at Salomon Smith Barney. "The problem with this market is that there are no secrets. One day the Russia problem isn't even on the radar screen, the next it's in your face."

The fear in the markets is that Russia will be the first domino in a line of troubles. With Russia essentially defaulting on its debts, the danger is that investors in emerging markets such as Latin America will demand higher rates to compensate for risks there, pushing fragile economies deeper into crisis, analysts say. Then U.S. banks and companies with international exposure would see profits suffer.

Other world stock indexes showed painful signs of international economic uncertainty. Japanese markets closed at their lowest level in more than six years as Japanese officials disagreed over how to repair the country's banking system. German markets were down 4.5 percent, and London markets, Europe's largest, were down 3.2 percent.

[Asian stock markets continued to fall in early trading Friday. Japan's key index was off nearly 3 percent, and indexes in South Korea, Hong Kong, Indonesia and Singapore were lower.]

No U.S. market and no sector of the market was left unscathed today. Declining issues on the New York Stock Exchange outnumbered those that gained by 2,872 to 360, and a hefty 938.62 million shares traded, up from 674.1 million Wednesday. Today's loss took the market to levels more than 10 percent below its July 17 high, making it an official "correction" in the parlance of Wall Street.

"The losses are extremely broad-based," said Terence Gabriel, an equities analyst at I.D.E.A. Inc. "It's terrible. Everything's going down. . . . Even the real stalwarts, like Intel and Microsoft, are falling."

The Nasdaq composite index, heavily weighted with technology stocks, took a beating, losing 81.72 points to close down 4.6 percent. The Standard & Poor's 500-stock index plunged 41.6, or 3.8 percent.

The market drubbing that has occurred in the past several weeks left the Dow, once up 18 percent, up just 3.3 percent for the year. The average stock on the New York Stock Exchange is down 32 percent from its high, Manley said.

Another barometer of financial unrest was the fact that the yield on two-year Treasury bonds dropped to 4.97 percent, below the 5.5 percent interest rate charged on federal funds, or overnight loans between financial institutions. That essentially means that those lending at 5.5 percent are getting a return of only 4.97 percent -- a sure sign that the market believes the Fed will have to lower interest rates.

"I think the Fed will be forced to lower rates," said Anthony Conroy, chief equities trader at Bankers Trust Investment Management, whose comments were interrupted by his shouts of "I want to sell as much as I can! Sell it!" "It's unbelievably hectic here," he said.

But Martin Mauro, senior economist at Merill Lynch & Co., disagreed. "There's a big dilemma facing the Fed. Their purpose is to promote economic growth here. So far, our economy is doing well," he said, noting that in the background of the market's plunge today was a strong labor report and a record housing-starts report.

Despite the turmoil overseas, the U.S. economy is enjoying steady growth, largely because of robust spending by consumers reaping the benefits of low interest rates, inflation and unemployment. But the pace of growth has slowed significantly since earlier in the year, in part because of slumping exports to Asia.

When Johnson entered the trading room at First Albany Corp. at midday, the anxiety was palpable, he said.

"This has been a difficult day, a very difficult day," he said. "You can feel -- oh, boy, you can feel a sense of tension, a lot of tension."

Even investors in mutual funds were nervous yesterday. "I wouldn't call it a calm day," said Edward Giltenan, spokesman for T. Rowe Price Associates Inc. in Baltimore. "We did see some movements out of international stock funds and into money markets," he said, noting that even before yesterday's drop, August had seen the first negative money flows from stock funds in five years.

None of a dozen analysts and economists surveyed today said he believed the market has hit bottom. And Friday is expected to be another difficult day, said several traders, who pointed out that no one wants to be holding stocks in the market over a weekend when so many crises could potentially worsen.

"I still think the prevailing direction is down," Gabriel said. "We're heading toward the season when companies give warnings of bad earnings. This market is in no condition to absorb negative earnings."

And, historically, September is the worst month of the year in the market.

The most hopeful comment of the day came from Conroy: "If we're not at the bottom, we're close. For the long run, I think it's healthy for the market. If you can withstand the pain and you've chosen good stocks, you should come out okay."