Stocks plunged back to earth today as investors, seeking to lock in profits before interest rates rise, abandoned a wide range of Wall Street's biggest darlings.
All the major indexes, which soared to record upon record in recent weeks, were battered. The Nasdaq composite closed below the 4000 mark it hit for the first time last week. The Dow Jones industrial average toppled below 11,000.
The carnage was widespread--from financials to smokestacks--but fell heavily on technology stocks that have led the bull market. Investors made a load of money on these stocks last year but held on to them to avoid having to pay taxes in the 1999 tax year.
Now, convinced that the Federal Reserve will raise interest rates when it meets Feb. 1 and 2, many people decided to sell the stocks that have risen the most. Many fled to bonds.
Analysts and economists said that the sharp declines were both necessary and expected for stocks' prices to reflect their true values. Yet almost no one seems to believe this signals the beginning of a bear market. Indeed, on Monday, a sell-off that started in Nasdaq stocks led to a buying binge by the end of the day, and investors may again decide the sharp drop today is an opportunity to shop for bargains.
Alan Day, an economist and portfolio manager who oversees $4.1 billion in assets at Stratevest Group in Burlington, Vt., for example, sold a hefty portion of his Amgen, Tyco and telecommunications shares that soared last year. "I figured I'd get the profits and lock them in--and start over again," he said.
The Nasdaq composite, which closed at a record on Monday, dove 229.46 points, or 5.56 percent, to close at 3901.69. It was the index's biggest drop in its 29-year history and its eighth-largest percentage drop.
The Dow Jones industrial average dropped 359.58 points, or more than 3 percent, to close at 10,997.93. The S&P 500 index lost 55.80 points, or 3.83 percent, closing at 1399.42.
"The Nasdaq composite was up 49 percent in the last three months," said Richard Cripps, managing director of equity research for Legg Mason Inc. in Baltimore. "And it's a new tax year. People are buttoning up profits, selling a portion of a stock instead of all of it."
The plunge was "so broad-based, it was alarming," said Philip Tasho, chairman of Riggs Investment Management Co., a $2.7 billion fund based in the District. "It affected tech stocks and financial stocks and small stocks and large stocks."
Many stocks opened lower--and kept heading south. Indeed, declining shares outpaced advances on the New York Stock Exchange by a margin of more than 2 to 1 as more than 1 billion shares changed hands. On the Nasdaq, losing issues swamped gaining issues about 3 to 1.
"Certainly, the speed of the rise in the last weeks and months of 1999 made a substantial correction inevitable," said Richard B. Hoey, chief economist and chief investment strategist at the Dreyfus Corp. "The market was overbought."
The dive clobbered a new breed of individual investors who have a taste for high-tech stocks. Tom Nicastri, who works for a computer company in New Jersey, lost a big chunk of his $80,000 portfolio.
But he is comforted by simply looking back at the vast gains in his portfolio over the past year. "It's shocking when you look at it today," Nicastri said. "But it's not shocking if you look at the last six months. I'm still way ahead. Unlike gambling in a casino, you don't lose unless you walk out."
Making the sell-off even more remarkable was that it coincided with the reappointment of Federal Reserve Chairman Alan Greenspan to a fourth term--a move widely viewed as positive on Wall Street.
"The fact that it went down so sharply in the face of that shows how great the concern is that stocks are overvalued," said Byron Wien, chief market strategist at Morgan Stanley Dean Witter.
Propelling the sell-off was a wide expectation that the Fed will raise interest rates. Minutes of the Fed's November meeting indicated interest rates should be raised, but the board waited to see what impact the year 2000 bug would have on the markets and the economy, fearing that a Y2K disaster would cool off the economy.
"Now, there's no question about whether they'll raise rates," said Allen Sinai, chief global economist at Primark Decision Economics. "The only questions are how many times and how much."
Some of the cash today was shifted into the bond market, pushing down the yield on a benchmark 30-year bond to 6.53 percent. But analysts said the plunge in stocks was not deep enough to satisfy the need for a correction--defined as at least a 10 percent drop--in stock values.
"The level of angst hasn't risen as much as it should, said Steve Shobin, chief technical analyst at Lehman Brothers. "Technically, the market had very little going for it."
Sinai said he is calling for a correction of 10 percent to 20 percent from the market's peak. "I would regard any correction as healthy," he said. "But in the long run it's still a bull market."
Some analysts bemoaned the inability of the market to shift from high-tech stocks, which some consider overpriced, to another sector of the market.
"If you have a team with one star and the star gets injured, then the team is finished," Shobin said. "Technology is getting injured here, but other sectors of the market didn't do better today."
Typically major market dives batter people who buy stocks on margins, or with loans--a prevalent practice in tech stocks in particular. But today, online brokers said that they did not have a surge in the number of loans on which they had to demand payment because there has been such a dramatic rise in stocks in the past couple of weeks.
"Today, we actually reduced the number of margin calls," said an Ameritrade spokesman.
He noted that a large number of customers benefited by recently "shorting" technology stocks, essentially betting they were overvalued and due to go down.
CAPTION: ABRUPT TURNAROUND (This chart was not available)
CAPTION: Trader Joseph Bellina talks on the phone yesterday at the Dow Jones pit at the Chicago Board of Trade.