Scandals, Profit Worries Send Stocks Near 9/11 Lows By Ben White Washington Post Staff Writer Saturday, June 22, 2002; Page E01
NEW YORK, June 21 -- Shaken by a scandal-du-jour business climate and concerned about the nation's underlying economic strength, investors dumped stocks again today, pushing the major indexes back near lows last touched after the Sept. 11 terrorist attacks. The Standard & Poor's 500-stock index fell 17.15 points, or 1.7 percent, to close at 989.14, the first time the broad index has ended the trading day below 1000 since Sept. 21. And the Dow Jones industrial average dropped 177.98 points, to 9253.79, the worst close for the blue-chip indicator since Oct. 31. "We are at maximum pain," said Stephen J. Massocca, president of Pacific Growth Equities in San Francisco. "The dollar is declining, earnings estimates keep getting revised lower, corporate malfeasance and accounting scandals continue to erupt daily and the Middle East is still a tinderbox. All the big issues facing the market are negative." An upbeat forecast from wireless technology firm Qualcomm Inc. today could not overcome bad news about IBM and Merck and the indictment of three former executives and one current employee of Rite Aid on securities and accounting fraud charges. The indictments further unnerved investors already spooked by fresh scandals at conglomerate Tyco International and biopharmaceutical firm ImClone Systems. And they came as the collapse of Enron, recently written off by some observers as old news, sprang back into investors' consciousness this week with the conviction last Saturday of the energy trader's accounting firm, Arthur Andersen, on an obstruction-of-justice charge. Tepid second-quarter earnings reported by several companies also helped push stocks to their fifth straight down week as investors questioned whether the sluggish economic recovery will ever gain steam or simply putter out. "People have been waiting for profitability to return for several months now," said Michael Obuchowski, a quantitative research analyst and portfolio manager at Ashland Management, which manages about $2 billion. "But despite lower unemployment numbers and several leading indicators inching higher, not much is happening in terms of profits. . . . And because of all these scandals, people are really waiting for tangible results before they put money back in the market." For the week, the Dow fell 2.3 percent, the Nasdaq dropped 4.2 percent and the S&P slipped 1.8 percent. Since May 17, the last time the indexes finished up for the week, the Dow and the S&P have each lost 10.6 percent and the Nasdaq has dropped 17.3 percent. The Dow has had the best year so far of the major indexes and is still 12.4 percent above its Sept. 21 finish of 8235.81. The Nasdaq is just 1.3 percent above its Sept. 21 close, and the S&P has only to drop another 2.4 percent to pierce its September low. Amid all the grim numbers, Qualcomm provided a lone bright spot today, announcing that increased demand for its wireless technology would improve third-quarter earnings. Its shares fell 21 cents, to $26.12. But IBM fell $2.83, or almost 4 percent, to $68.75, after Lehman Brothers Inc. lowered its earnings expectation on the stock. And investors sold shares in Merck after a Wall Street Journal report questioned the drug giant's accounting practices. Merck has denied wrongdoing. Both IMB and Merck are Dow components and helped drive the overall index down for the day. Market observers had expected hectic trading today on what's known as a "triple witching day," when index futures and index and stock options all expire at once. The simultaneous options expirations occur only four times a year. Several academic observers and money managers said that despite recent drops, stocks remain expensive by historic ratios to corporate earnings and could fall even more if scandals continue to pile up and erode investor confidence. "Something is true today which has been true only now and again in the past," said Harvard Business School professor Richard S. Tedlow. "And that is that there is a spotlight on individuals. You see their pictures in the paper. You see them testifying before congressional committees. They have names. You can understand what they did wrong." Tedlow said the current market environment felt different from the events leading to the crash of 1987. "It's hard to recall anyone particularly associated with that," he said. "What's going on now has far more in common with the 1920s and 1930s, when a number of famous people went to jail." But Tedlow and several money managers cautioned that the underlying economy is far stronger than it was in the days of the Great Depression and that, should earnings finally pick up in the second quarter as many expect they will, stock prices could begin to recover late this year or early next year. "In general, the economy looks reasonably solid, particularly housing and automobiles," said Scott Kuensell of Delaware-based Brandywine Asset Management, which oversees about $8 billion. "Retail has been slightly disappointing lately but overall it remains relatively strong. We don't have a strong head wind working against us. If we could just get beyond this daily drumbeat of negative news." James Paulsen, chief investment officer at Wells Capital Management in Minnesota, which oversees $75 billion in assets, said stocks could continue to suffer if investors succumb to what he calls "Fed policy panic" -- fear that the Federal Reserve, which repeatedly lowered interest rates until the economy seemed to gain firmer footing in recent months, will run out of tools to boost the economy and the markets. But Paulsen also suggested that the Bush administration could press for further economic stimulus legislation. "The good thing is we have a lot of policy ammunition left in the holster," he said. Other Indicators . The New York Stock Exchange composite index fell 7.95, to 534.35; the American Stock Exchange index rose 3.29, to 911.05; and the Russell index of 2,000 small stocks rose 0.82, to 461.07. . Declining issues led advancing ones by 3 to 2 on the NYSE, where trading volume rose to 1.93 billion shares, from 1.4 billion on Thursday. On the Nasdaq, decliners outnumbered advancers by 9 to 8 and volume totaled 1.81 billion shares, up from 1.66 billion. . The price of the Treasury's benchmark 10-year note rose 94 per $1,000 invested, and its yield fell to 4.76 percent, from 4.78 percent late Thursday. . The dollar fell against the Japanese yen and the euro. In late New York trading, a dollar bought 121.43 yen, down from 123.37 yen late Thursday, and a euro bought 97.05 cents, up from 96.52 cents. . Light, sweet crude oil for August delivery settled at $25.82 a barrel, down 13 cents, on the New York Mercantile Exchange. . Gold for current delivery rose on the Commodity Exchange division of the New York Mercantile Exchange to $324.60 a troy ounce from $323.20 on Thursday.
