Dow drops nearly 360 points; other stocks hit hard

Posted: Tuesday, January 04, 2000

NEW YORK - Stocks plunged back to earth Tuesday, 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 4,000 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 onto 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. 4, 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 Tuesday is an opportunity to shop for bargains.

The Nasdaq composite, which closed at a record on Monday, dove 229.46 points, or 5.56 percent, to close at 3,901.69. It was the index's biggest drop in its 29-year history and its third-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 Washington D.C. ``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 last 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, 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 Y2K 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.''

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