Dow Falls 247 in Second-Biggest Point Drop Ever

Blue-chip stock prices plummeted on Friday, recording their biggest percentage loss in nearly six years, amid growing investor concern about prospects for the U.S. multinational companies that have led the long bull market.

The Dow Jones industrial average of blue-chip shares tumbled 247.37 points to 7,694.66, a 3.1% drop that was the worst in percentage terms since the index fell 3.9% on Nov. 15, 1991.

In terms of points, Friday’s Dow loss was the second biggest in history, after the 508-point plunge of Black Monday on Oct. 19, 1987.

But the Dow’s point moves have become less significant as the index has surged in the 1990s. And analysts noted that Friday’s slump was not accompanied by heavy trading volume and was not felt as sharply in stocks of most smaller companies.

Also, technical trading techniques used by some institutional investors aggravated the blue-chip slide, experts noted.

Still, many analysts warned that the decline could spark additional selling in coming days, producing a pullback of 10% or greater in key stock indexes--a classic market “correction”--if more investors turn eager to reap some of the huge paper profits they have accumulated in stocks this year.

In fact, a mutual-fund tracking service, Market Trim Tabs in Santa Rosa, Calif., reported Friday that U.S. stock mutual funds suffered $4 billion in net outflows in the week ended Thursday, a significant reversal as some investors opted to cash out.

Yet the Dow index remains up 19.3% year-to-date, despite falling 6.8% since reaching its record high of 8,259.31 on Aug. 6. The average U.S. stock mutual fund was up 19.4% through Thursday, according to Lipper Analytical Services.

“We don’t have a bad economy, but earnings expectations are dramatically high and most of the big stocks are overvalued,” argues Michael Metz, a veteran Wall Street money manager at brokerage Oppenheimer & Co.

Indeed, the spark for Friday’s decline was a warning from razor-and-blade giant Gillette Co. that its earnings growth this year and next will be slightly less than expected. The company cited disappointing recent results from its Braun appliance unit in Germany and Japan.

The warning sent Gillette shares tumbling nearly 5%, down $4.19 to $85.88 a share on the New York Stock Exchange.

More disconcerting for the market was that Gillette’s warning followed by one week an announcement from Coca-Cola Co. that its earnings in the current quarter would be only slightly above year-earlier results, apparently because of foreign currency gyrations.

Because Wall Street has bet so heavily in recent years on the normally dependable earnings growth of major blue-chip multinational companies like Gillette and Coca-Cola--pushing those stocks to extremely high levels relative to earnings per share--any disappointing news from the companies makes the stocks vulnerable to sharp sell-offs, analysts warn.

“Suddenly people who have been blindly buying these stocks because the companies have always produced positive earnings surprises sat up and took notice” of the stocks’ heights, said Philip Orlando, investment strategist at Value Line Asset Management in New York.

Coca-Cola shares, which peaked at $72.63 in mid-June, have slid 19% in recent weeks, closing Friday at $58.75.

While many Wall Street pros note that the problems at Gillette and Coca-Cola seem minor and short-term in the context of their huge global franchises, the companies’ announcements have added to a growing list of worries that have weighed on the nearly 7-year-old bull market in recent weeks:

* Long-term bond yields have risen moderately from 18-month lows reached July 31, amid concerns that economic growth may pick up soon.

The bellwether 30-year Treasury bond yield, a benchmark for other long-term interest rates, such as for mortgages, closed at 6.54% on Friday, unchanged for the day but up from 6.30% on July 31.

Stan Nabi, vice chairman of investment firm Wood Struthers & Winthrop in New York, believes that economic growth is likely to accelerate soon, which may put further upward pressure on interest rates.

Even so, the Federal Reserve Board, which meets Tuesday, isn’t expected to tighten credit at this meeting.

* Fears are mounting in Europe that the Bundesbank, the German central bank, may raise interest rates soon to help strengthen the mark, which until recently was plunging against the dollar.

Higher rates in Europe could further slow its already anemic economies, potentially hurting profits of U.S. multinational companies, analysts say.

* A continuing wave of currency devaluations by Southeast Asian nations has hammered their stock markets in recent weeks and raised the specter of a new flood of cheaper imports from those economies to the United States.

While cheaper imports would be welcomed by many U.S. consumers, they could make life tougher for U.S. companies whose products may compete with those imports.

* Finally, the United Parcel Service strike has unnerved some investors, who fear that it could herald that American workers, amid a tight labor market, will increasingly demand better pay and more favorable hours, which could reduce companies’ long-term earnings growth--the ultimate driver of stock prices.

Yet many Wall Street pros insist that the positive fundamentals underlying the bull market haven’t gone away, nor are they likely to any time soon.

“What I’m telling my clients is that unless the earnings and interest-rate picture changes [significantly], you should still be a net buyer of stocks” on declines, said Robert Markman, head of Markman Capital Management in Minneapolis.

Indeed, Markman and other pros note that the market faced similar concerns about interest rates and corporate earnings in the summer of 1996, and again in March and April of this year. Both times, the Dow index pulled back nearly 10% before stabilizing, then rebounding, as earnings growth remained strong and interest rates eased.

“I think this is the same variety of decline we saw in spring and last year,” said Nabi.

A 10% drop in the Dow from its recent peak would take it to about 7,430. That would still leave the index up about 1,000 points, or 15%, since Jan. 1.

“We wouldn’t mind a 10% to 15% decline,” said Kurt Brouwer, a principal at money management firm Brouwer & Janachowski in San Francisco. Echoing the sentiments of many investors who believe the market has risen too far too fast over the past 20 months, Brouwer said he would consider a 10%-to-15% decline “a healthy thing” for the market.

The question is whether the Dow and other major indexes could hold their decline to 10% to 15%, if selling begins to accelerate.

Since 1990, the Dow has yet to decline more than 10%, leading some analysts to worry that a loss greater than that could trigger heavy selling by investors unaccustomed to losing meaningful amounts of their principal.

Charles Biderman, editor of the Market Trim Tabs newsletter, said the outflow of $4 billion from U.S. stock funds in the week ended Thursday, and $1 billion from foreign stocks funds, were small dollar amounts relative to the $2-trillion total in stock funds.

But those outflows occurred before Friday’s tumble, which means more fund investors could be compelled to sell next week.

Biderman noted that the market’s direction is determined “at the margin,” meaning by a relatively small change in the intensity of buying or selling.

With many mutual fund investors nervously eyeing their large paper profits, and publications such as Money magazine recently advising people to sell some of their stocks to cash in after seven years of gains, Biderman worries that “if the market keeps going down, outflows [from the funds] aren’t going to cease” anytime soon, and that outflows could feed the decline, and vice versa.

Bloomberg News contributed to this story.

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The Dow’s Wild Ride

The Dow Jones industrial average sank 247.37 points, or 3.1%, as it spiraled Friday to its second-worst point drop ever. The index has lost more than 560 points in the last seven trading days after hitting peak of 8,259.31 on Aug. 6.

* Dow industrial average every 15 minutes

Dow opened at 7942.03 at 9:30 a.m., EDT

At the closing bell on Friday, Dow had dropped 247.37

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* Dow weekly close

Friday’s close: 7,694.66. Year to date the Dow is still up 19.3%