Another number is coming--and investors are taking cover.
Fearing that a government report on inflation due out Tuesday will signal higher inflation and drive up interest rates, shareholders continued fleeing public companies they believe are most vulnerable--those whose share prices are highest compared with profits.
On Wall Street, this is known as the price-to-earnings ratio, or P/E for short. And it is especially a problem for the high-technology companies that have driven the bull market. "Many of these guys don't have the 'E' yet," said Greg Smith, an analyst at Hambrecht & Quist, an investment-banking firm.
The sudden interest in valuations wreaked havoc on the Nasdaq Stock Market, which is populated with those technology stocks that have defied conventional investment models. The Nasdaq composite index slipped 99 points early in the day and then rebounded, closing down 42.68 points, or 1.6 percent, at 2689.15.
The Dow Jones industrial average fell below the symbolic 10,000 mark before a late-day rally driven by news that J.P. Morgan & Co.'s third-quarter earnings beat expectations. The Dow closed up 96.57, or 1 percent, at 10,116.28.
The Standard & Poor's index of 500 companies moved up 6.72, or 0.5 percent, to 1254.13.
The number due out Tuesday is the consumer price index, which may bolster expectations that the Fed will raise interest rates when it meets Nov. 16. On Friday the government released the producer price index of wholesale prices, which showed the largest increase since September 1990, during the Persian Gulf crisis. That report pulled down the markets, capping a week that was the worst in a decade for both the Dow and the Standard & Poor's index.
"This tech sell-off is a delayed reaction to what happened to interest rates last week," said Gail Dudack, chief market strategist at Warburg Dillon Reed. The yield on the benchmark 30-year Treasury bond lingered near a two-year high.
"All weekend, everyone was talking about how the P/E of the entire market will be depleted by higher interest rates," she said. "So investors sifted through and singled out those that are most overpriced."
Since hitting a record a week ago of 2915.95, the Nasdaq has declined 7.8 percent--or 227 points.
"Economists can breathe a sigh of relief," said Bill Burnham, an analyst at Softbank Ventures, the giant Japanese investor's Silicon Valley arm. "Investors are finally stopping and waiting for stock prices to fall to reality."
The late turnarounds were attributed to various factors, including computer programs designed to buy when stocks hit a certain low and mutual funds pumping cash back. Still, the gains were in a few stocks. Only one stock rose for every two that fell on the New York Stock Exchange.
"There's a strong possibility that we'll see a leadership change here," said Byron Wien, chief investment strategist at Morgan Stanley Dean Witter. "Value stocks, sensitive to the economy, mid-cap and small-cap will do better when it's over."
Since early summer, investors have been slowly weeding out stocks that have surged too high, in a move that has affected small- and mid-cap stocks--but has been barely evident in the Dow and the S&P. "In just the last few weeks, that insidious decline has gotten to the big stocks--and to technology," said Dick McCabe, chief technical analyst at Merrill Lynch.
Many investors are fretting about the effects of Y2K, when computers might be affected by the calendar turn to 2000--an event Federal Reserve Chairman Alan Greenspan said investors should ignore but conceded was the "countdown to the unknown."
Richard Cripps, chief market strategist at Legg Mason Wood Walker in Baltimore, is one of many professionals who has called the millennium bug a non-issue. "I'd always be the first to say no, that's silly," he said. "But the answer is yes. I know it by seeing all the inertia on the buy side. We've always seen people buy on the dips. There's no other explanation but that Y2K is keeping people away."
Consider the cash coming out of mutual funds--and going into money markets. Cash as a percentage of assets has bobbed between 4 percent and 8 percent since 1994, according to the Investment Company Institute.
Now it is relatively low--4.6 percent--but rising fast. For the week ending Oct. 6, for example, individuals plowed $3.45 billion into money markets, pushing up assets in the safe cash accounts to $908.17 billion.
Also, many investors are still ahead for the year--and seem to fear they won't be much longer.
"When people have made so much money in a set of stocks, they are much more willing to believe the bad news, because they are very worried about holding onto the gains they made," said Burnham.
Today's tumble was led by Hewlett-Packard Co., which dropped 4-11/16, to 78-1/16. Intel lost 1.5 percent, to 69 3/8.
Investors battered Lexmark International Inc., a major maker of inkjet and laser printers, when it said fourth-quarter profit would be slightly lower than expected. Shares plunged 29 to 65--the second-biggest percentage loss on the New York Stock Exchange.
And they rewarded positive news, lifting the stock of J.P. Morgan 7-5/16, to 113, and bringing other financials with it.
In fact, interest-rate fears are countering good earnings reports, which are flooding out this week. Analysts expect growth of 19.9 percent in the third quarter, according to First Call.
Abby Joseph Cohen, a Goldman Sachs partner and chief market prognosticator, said she expects earnings to be bullish and asserted that the S&P 500 is still 5 percent undervalued after last week's 6.6 percent slide.
Referring to investor skittishness, she said in a report to clients, "We believe these concerns are unwarranted."
CAPTION: Little Relief (This graphic was not available)