Stocks slumped sharply today as investors fled a wide array of corporations whose profits could be hurt if a policy-setting committee of the Federal Reserve Board next week raises interest rates to control inflation.
"Aaaaaaah!" was Henry "Hank" Herrmann's visceral reaction after the market closed, officially giving the Nasdaq composite index its worst weekly loss--a decline of 8.2 percent--since August 1998, when world financial markets were in turmoil after Russia defaulted on some debt securities.
Herrmann, chief investment officer of Waddell & Reed, an Overland Park, Kan., manager of $37 billion in funds, added: "It's pretty ugly out there."
Indeed, the carnage was widespread, pulling down two stocks on the New York Stock Exchange for every one that rose.
The Dow Jones industrial average slipped 289.15, or 2.6 percent, to 10,738.87. The Nasdaq index slid 152.49, or 3.8 percent, closing at 3887.07. The Standard & Poor's 500-stock index, a popular vehicle for index funds, fell 38.41, or 2.8 percent, to 1360.15.
Both onetime highfliers such as Qualcomm, the biggest gainer on the S&P 500 last year, and industrial bellwethers such as General Electric were hit hard. Qualcomm fell 89-7/16, to 110-9/16, for a drop of 37 percent so far this year. GE, whose GE Capital unit is the largest non-bank finance company, fell 7-11/16, to 134.
The market got off on a bad foot, after the government's new employment cost index confirmed that companies were having a tough time finding workers and that the gross domestic product grew more than expected, possibly portending inflation and struggling profits. This reinforced expectations that the Federal Reserve will raise key short-term interest rates when its policy committee meets next week.
"The market is just coming back down from cyberspace and recognizing that here on planet Earth the Fed will raise rates," said Ed Yardeni, chief economist at Deutsche Bank. "We had a very narrow market last year. But I have to say this is an outsized reaction to a quarter-point hike that we expected."
Rising rates squeeze corporate profits, so they particularly batter those with high prices relative to earnings, such as telecommunications issues and computer companies. Banks and other financial institutions also get clobbered because it costs them more to borrow money.
Internet stocks also took a clobbering. Amazon.com, which announced it would lay off 2 percent of its employees, fell 5 1/4, to 61-11/16. America Online fell 2-15/16, to 58-13/16, and Yahoo fell 24 1/8, to 313 1/4.
Bob Basel, head of block trading at Salomon Smith Barney, said there was a wave of "program selling" by funds tied to the S&P 500 because it added two companies. To accommodate the new purchases and continue to mirror the index, he said, they had to sell some of the other 498.
"You think of all the index funds doing that around here and you have quite an impact," Basel said.
Andrew Brooks, chief equities trader at T. Rowe Price, said it has become exasperating lately trying to sell stocks, because investors are getting more suspicious than ever about sellers' motivations.
"It's pretty obvious what's for sale and what's to be bought," Brooks said. "Because now, we're in one of these environments where people are selling things that haven't worked, and everybody's flocking to the things that are working. Everybody's running to the same side of the boat, and that's making the ride a little rocky."
David Blitzer, chief economist at Standard & Poor's, predicted that the decline would continue in the short term. "When everybody goes home and agonizes about this all weekend, they'll come in and sell again," he said.