The Dow Jones industrial average today suffered its worst loss in a year, dipping briefly below the symbolic 10,000 mark it bridged in March, as investors recoiled from most of the highflying stocks that have driven this stage of the bull market.
The sell-off was triggered by a warning Thursday night from Federal Reserve Chairman Alan Greenspan that lenders should be sure they are prepared for a possible drop in stock market values and by a government report today that wholesale prices soared last month to the highest one-month rate in nine years. The report reinforced investor fears that the Fed could boost interest rates again to head off inflation when its policymaking body meets Nov. 16.
The Dow average and the Standard & Poor's 500-stock index, a common benchmark for mutual fund investments, suffered their worst week in a decade.
Interest rate fears had rattled the market repeatedly even before today's report. Higher rates can dilute the value of stocks and make other investments more attractive.
The market rout, affecting many of the year's top performers, also exposed a hidden chasm in the market: A handful of stocks have accounted for much of the rise in broader market indexes, while hundreds of other stocks have fallen sharply this year.
"We have been in a stealth bear market," Merrill Lynch & Co. stock analyst Walter Murphy said. "It almost goes without saying: The rally that began in October 1998 is over. Now, we are correcting the excesses that built up."
The Dow average sank 266.90, or 2.6 percent, to 10,019.71. The S&P 500 index slumped 36.01, or 2.8 percent, to 1247.41, while the Nasdaq composite index fell 75.01, or 2.7 percent, to 2731.83.
For the year, the Dow is up about 9 percent and the Nasdaq has risen about 25 percent. And the S&P 500 has returned a paltry 1.5 percent, less than most bank savings accounts.
But the Dow is made up of just 30 blue-chip stocks and much of the Nasdaq's return can be attributed to 10 stocks. In the S&P 500, seven stocks have driven most of its meager growth. In fact, 284 companies in the index are down for the year -- 136 are down more than 26 percent and 68 have dropped more than 30 percent.
Moreover, the Dow has fallen 11.5 percent since its high for the year, more than the 10 percent level deemed to be a "correction."
"There really is no one market anymore," said Ed Yardeni, chief economist at Deutsche Bank, who believes the Dow will drop to 8,000 by March. "There are many."
One striking example of the fractured markets can be found within the Wilshire 5000 index, which calculates the total value of all publicly traded stocks. It is down 1.8 percent for the year.
Within the Wilshire index are 290 Internet stocks -- about 7 percent of the total market's capitalization. These stocks were up 51.27 percent for the year. "So, if you took these Net stocks out, you'd reduce the return by about 75 percent," Wilshire senior vice president Stephen Nesbitt said. Last year those stocks gained 161 percent for the year.
This is the kind of arithmetic that is making professionals cringe. The fact that stocks that represent such a small slice of the market can drive all the barometers so high means they can also drive them down.
"The market got awfully rich, and now people are cashing out," Yardeni said. "It's a seasonably weak period, anyway. And looming over all this is Y2K," the possibility of computer disruptions when the calendar turns to the year 2000.
According to Trimtabs.com Investment Research, a Santa Monica company, $6 billion was pulled out of equity mutual funds Wednesday -- the worse outflow since March 22, as the Dow average fell 416 points over two days.
Just a week later, though, the Dow marched past 10,000, a symbolic threshold that had been long anticipated. It soared above 11,000 in July.
Since then, worries have mounted about the strength of the U.S. dollar and rising interest rates. Earnings have been good -- the best since the beginning of 1995 -- but not good enough for bull market babies.
"It depends on whether you see the glass half full or empty," said Charles Hill, research director at First Call Corp., which tracks corporate performance. Analysts tracked by First Call expect corporate earnings this year to grow by 17 percent -- well ahead of the average 7 percent and last year's 3.7 percent. Next year, those same analysts predict earnings could drop 13 percent.
"They say buy on bad news, sell on good news," Hill said. "This is as good as it gets."
Toss in the mystery of October, the month the market crashed in 1929 and 1987. Approaching the end of the year, it is a time of profit-taking for many investors. Sometimes, the market has a big stumble.
"It's been bloody," said Wayne Howe, an inventor who day-trades stocks from his home in Columbus, Ohio. "Lately, everybody I know has been very, very scared."
That sentiment is echoed on the vast trading floor of Morgan Stanley Dean Witter. "The last six weeks certainly have been an anxious period," said Jon Olesky, head stock trader. "Investors have generally raised the levels of cash at the expense of owning stocks."
Howe is among those who have been gradually shifting from stocks to cash. This week, a software program that tracks market indicators "told me to get out of the market," he said.
Howe had $200,000 in the market a few weeks ago. Now, he has zero. Yet Thursday, his computer indicated that he could dip a toe back in.
Greenspan's remarks, made in a speech Thursday night and widely reported in newspapers this morning, also unnerved investors. Losses, Greenspan told a meeting of bankers, "will inevitably emerge from time to time when investors suffer a loss of confidence," as they did last year when Russia defaulted on a portion of its debt.
Surging stock prices, he said, have raised the risks for investors and lenders, and financial institutions should be sure they have adequate reserves to weather market panics.
"I haven't come across many people who have bet against Alan Greenspan and won," said money manager Jim Gribbel of the Babson Growth Fund, which has been getting out of hot performers such as Anheuser-Busch Cos. "Anyone trying to fight the Fed in this market is coming up short -- way short."
Markets around the globe reacted to Greenspan's comments. Japan's Nikkei 225 index fell 1 percent and Hong Kong's Hang Seng index fell 1.5 percent. In Europe, benchmark indexes in all eight of the biggest markets declined.
Then, just before U.S. markets opened, the Labor Department said producer prices had jumped an unexpectedly sharp 1.1 percent in September. Investors ran for the exits.
Financial stocks, which are especially affected by higher interest rates, were hit hard. J.P. Morgan & Co., American Express Co. and General Electric, which owns G.E. Capital, contributed 85 points to the Dow's decline. Microsoft Corp., which has the highest stock market value of any U.S. company, was one of the most active, tumbling $2.62 1/2 a share, to $88.06 1/4.
Investors pumped money into the relative safety of bonds, pushing up prices. The yield on the 30-year Treasury, which moves in the opposite direction, fell to 6.27 percent.