Economic Worries Push Stocks Lower

A widespread stock sell-off Friday sent major U.S. indexes to their worst weekly losses since September as a softening dollar, uncertainty over the pace of economic growth and fears of inflation rattled investors.

The day’s declines--a near-50-point slide in the Nasdaq composite to 1,663 and a 124-point drop in the Dow Jones industrial average to 9,910--left Nasdaq down 7.4% for the week and the Dow off 3.4% despite a surprisingly strong first-quarter tally of gross domestic product.

A fresh spate of corporate earnings disappointments reinforced the air of economic uncertainty on Wall Street.

Meanwhile, the dollar continued to weaken against the euro and Japanese yen, while gold surged above $311 an ounce. The euro, which has rallied from below 86 cents in the last three months, closed Friday at 90.2 cents, up from 89.8 cents Thursday.

“When the dollar softens up like this it feeds on itself by making U.S. investments less attractive” to foreigners, said Jay Mueller, economist and portfolio manager at Strong Capital Management in Milwaukee. “It reinforces the trend of foreign investors to step away from our markets.”

Mueller said the weaker dollar and the shaky stock market during the last few weeks reflect waning confidence among global investors in the notion that the U.S. economy “is in the clear and heading for a major expansion.”

Some nervous investors turned to a traditional sanctuary: Near-term gold futures in New York soared to a two-year high of $311.60 an ounce from $308.10 on Thursday.

In active trading on Wall Street, the Nasdaq sank 49.81 points, or 2.9%, to 1,663.89, its lowest since Oct. 18. It was the tech-heavy index’s biggest weekly drop since the week ended Sept. 21, when it plunged 16.1% as trading resumed after the Sept. 11 attacks.

The Dow lost 124.34 points, or 1.2%, on the day, to 9,910.72, closing below 10,000 for the first time since Feb. 22. The Standard & Poor’s 500 slid 1.4% to 1,076.32 and was down 4.3% for the week.

Losers swamped winners Friday by 2 to 1 on Nasdaq and 3 to 2 on the New York Stock Exchange.

The three major U.S. indexes now are in the red year-to-date. The largest technology and telecom names have taken the brunt of the blow: The Nasdaq 100 index, comprising the largest non-financial stocks on Nasdaq, is down 20.7% since year end.

Although the dollar remains historically strong against other currencies, it remains highly valued based on underlying U.S. economic fundamentals, said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

That raises the risk of further declines, which in turn could fuel “a cycle of higher inflation and interest rates--two things the stock market doesn’t like,” Sohn said.

“If Hondas and Toyotas become more expensive because of the currency translation, then General Motors and Ford can raise their prices,” Sohn said. If the Federal Reserve sees such inflationary signs, it is likely to raise interest rates starting in the summer, he said.

Although most economists expect higher interest rates by year-end, Mueller said he considers corporate earnings, rather than inflation, the key issue for the stock market. The consumer price index and other inflation indicators remain “well behaved,” he said.

Early Friday, the Commerce Department said gross domestic product grew at an annualized real rate of 5.8% in the first quarter, the best showing since the fourth quarter of 1999.

But profit warnings from the likes of General Mills and JDS Uniphase raised new questions about whether the economic rebound will translate into the earnings recovery that the powerful post-Sept. 11 stock rally had signaled.

A drop in the University of Michigan’s monthly consumer confidence index also muted enthusiasm over the GDP data.

Mueller said the economy is likely to recover more mildly, perhaps in the 3%-to-4% range, over the next three quarters. “This looks like a ‘Goldilocks’ recovery--not too hot and not too cold. The problem is, the stock market wants it to be hotter.”

Sohn said he expects GDP growth of about 3% over the next three quarters.

“There isn’t much pent-up demand among consumers,” he said, noting that sectors such as housing never ran out of steam. In addition, the possibility of another spike in oil prices stemming from the Mideast crisis could thwart any recovery, he said.

Over the next two years, the widening trade gap could become a bigger drag on the U.S. economy, Sohn said. The current account balance, the closest thing to a measure of the nation’s cash flow, now runs about $1.3 billion a day in the red, and by 2003 it could be $1.6billion a day, he said: “That’s a lot of negative cash flow.”

The current-account balance essentially measures U.S. dependence on foreign capital. “The question is whether [foreigners] might become reluctant to invest, and even pull money out, because of rising interest rates and the weakening dollar,” Sohn said.

So far, the Treasury bond market isn’t showing signs of heavy foreign withdrawal: Demand for bonds rose this week as stocks fell. The yield on the benchmark 10-year T-note dropped to 5.05% Friday from 5.09% Thursday, and now is the lowest since March 6.

Among Friday’s highlights:

* General Mills lost $2.37 to $42.93 after trimming profit estimates for this year and next, citing problems integrating its Pillsbury acquisition and a dearth of new products.

* JDS Uniphase fell 50 cents to $4.53 after the maker of fiber-optic equipment reported a wider-than-expected loss last quarter and said sales remain sluggish.

Elsewhere in the tech sector, Microsoft dropped $2.23 to $51.50, weighing on the major indexes; VeriSign plunged $8.35 to $9.89 after cutting second-quarter revenue and earnings forecasts; and Intel slipped 97 cents to $28.12.

* Walt Disney fell 90 cents to $24.10 after UBS Warburg downgraded the shares to “hold” from “buy,” citing weak ratings for ABC.

* Goldman Sachs rose $1.94 to $79.15 after Merrill Lynch recommended the shares, saying the company’s customer base of institutions rather than individuals may shield it from conflict-of-interest lawsuits over analysts’ conduct.

* Dynegy dived $4.31 to $14.90. Moody’s Investors Service put the firm on review for possible credit downgrade, citing accounting concerns.

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Market Roundup, C4-5