Stocks Tumble 273 Points on Economic Worries

August 5, 2002

NEW YORK  — Stocks dropped sharply Monday as a slowdown in growth in the U.S. service sector added to investors' jitters about a "double-dip" economic recession.

The blue-chip Dow Jones industrial average ended down 273 points at 8,039, according to the latest data, while the technology-packed Nasdaq Composite Index was down 42 points at 1,205. The broader Standard & Poor's 500 Index was down 30 points at 835.

"There is an uneasy feeling that with the economy slowing, the earnings picture will follow and, not disintegrate, but weaken," said Barry Hyman, chief investment strategist at Ehrenkrantz, King, Nussbaum.

Wall Street is grappling with fears the world's largest economy may be poised for a double-dip recession, two periods of recession separated by a brief economic upturn.

"A lot of people think we will actually avoid a double-dip recession, but the fear is still out there," said Michelle Clayman, chief investment officer at New Amsterdam Partners, which oversees $1.4 billion. "For the retail investor, it may take a bit of of time until they have confidence in the market again."

Leading network equipment maker Cisco Systems Inc. fell more than 4 percent ahead of its quarterly earnings scheduled for after the bell on Tuesday as investors worried the tech bellwether may bring more disappointing news.

The Institute for Supply Management said its monthly non-manufacturing index fell to 53.1 in July from 57.2 in June, marking the second straight month the index has fallen. The figure was below analysts' forecasts for a dip to 54.6 and down from a nearly two-year peak of 60.1 in May.

The service sector makes up more than two-thirds of the economy and includes everything from tourism to legal help, while anything below 50 denotes contraction.

In a sign the pace of service sector growth may slow further in coming months, the new orders index -- a gauge of future demand -- fell to 52.6 from 56.9 in June. Survey respondents said that while the economy continued to improve, the outlook remained cautious through year-end.

A slew of disappointing data last week showed tepid growth in the economy in the second quarter, a slowdown in the manufacturing sector in July and a slump in construction spending in June.

As stocks skidded and bonds rallied last week, speculation grew that the Federal Reserve might cut interest rates yet again. Goldman Sachs economists on Friday said they expected interest rates to fall by 0.75 percentage point to 1 percent by year's end. That would be the lowest rate since 1958.

Web gear giant Cisco dropped 60 cents to $11.30, ranking as the most active share on the Nasdaq. Lehman Brothers cut its rating on the company to "equal weight" from "strong buy," citing subdued demand for network equipment. Cisco is expected to report its quarterly earnings on Tuesday after the bell.

J.P. Morgan, down $1.40 to $22.45, and Citigroup, off $1.67 at $29.21, pressured the Dow. Lehman Brothers cut its 12-month price target for Citigroup to $43 from $55 and J.P. Morgan to $31 from $39. Lehman cited a tough operating environment and economic uncertainty.

Power producer Mirant Corp. tumbled 50 cents, or more than 14 percent, to $2.99. The company said the U.S. Securities and Exchange Commission has launched an informal inquiry after the company disclosed last week that it overstated the value of assets and liabilities in its 2001 financial statements.

Cable television operator Cox Communications Inc. skidded $4.82, or more than 19 percent, to $20.20. Credit Suisse First Boston cut its investment rating on the company to "hold" from "strong buy," citing concerns that accounting for subscriber turnover will hurt profit margins.

Automotive parts maker Collins & Aikman Corp.  plunged $3.02, or more than 54 percent, to $2.50. The company reported a loss after charges for the repurchase of preferred stock, and the company's stock plunged by more than half to an all-time low.

Procter & Gamble Co. could offer support to the Dow. The consumer products giant posted a quarterly profit that beat analysts' estimates on strong sales of beauty, fabric care, and other products.

Investors are wary of fresh scandals after a string of accounting blow-ups that have rocked confidence over past months. The Wall Street Journal reported on Monday that federal prosecutors are investigating whether or not Enron Corp. bribed foreign government officials to win contracts abroad.

The market enjoyed a big rally last Monday when the Dow raked in its third-largest point gain ever. That run-up had sparked hopes the market was poised for an upturn, but a two-day sell-off at the end of the week eroded those gains.

For the week, the Dow edged up almost 0.6 percent, the Nasdaq lost 1.1 percent and the S&P 500 gained 1.3 percent. The Nasdaq has fallen five weeks in a row.

Losers beat out winners by a ratio of 2 to 1 on both the New York Stock Exchange and Nasdaq. More than 596 million shares changed hands on the Big Board, and more than 614 million on Nasdaq in average trading volume.

The Russell 2000 index rose 3.87 to 372.58. 

Overseas, Japan's Nikkei stock average fell almost 1.0 percent. In afternoon trading, Germany's DAX index slipped 4.1 percent, Britain's FTSE 100 was off 1.4 percent, and France's CAC-40 dropped 2.7 percent.

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