Dow Slumps to 5-Month Low

Wall Street on Monday took another hard hit from interest-rate and geopolitical fears. But some analysts also saw signs that the market may be trying to bottom out after several rough weeks.

The Dow Jones industrial average tumbled 127.32 points, or 1.3%, to 9,990.02 -- its first close below 10,000 since Dec. 10. It was the blue-chip Dow’s eighth loss in 11 sessions.

Foreign markets also fell sharply. Japan’s main index dropped 4.8% and South Korea’s plunged 5.7%. European shares lost between 2% and 3%.

Investors worldwide increasingly have concluded that U.S. interest rates have nowhere to go but up as the economy improves. That idea gained fresh converts Friday after the government said the nation created a net 288,000 jobs in April, well above expectations. Higher interest rates historically have been a depressant on stock prices.

Investors also have faced a barrage of other bad news in recent weeks, including soaring oil prices, concerns about China’s economy and a deepening crisis in Iraq amid revelations that U.S. military personnel abused Iraqi prisoners.

Yet the U.S. market’s pullback, as measured by broad indexes of the biggest stocks, has been relatively modest so far: The Dow is down 7% from its 2004 high of 10,737.70 reached on Feb. 11. The Standard & Poor’s 500 index, which fell 11.58 points, or 1.1%, to 1,087.12 on Monday, is off 6.1% from its 2004 peak, also reached on Feb. 11.

Certain stock sectors have suffered deeper losses. But analysts said it was an encouraging sign Monday that some of those sectors rallied even as the market overall slumped. For example, many semiconductor stocks edged up, as did some mining shares that have been battered by fears that China’s growth would slow.

“There are signs that the market is trying to dig in at this level,” said Peter Boockvar, equity strategist at investment firm Miller Tabak & Co. in New York. He noted that the Dow rallied back in the final 30 minutes of trading, after falling nearly 185 points earlier in the session.

The technology-dominated Nasdaq composite index, which was down about 2% at its low early in the day, recovered about half of that decline to close off 21.89 points, or 1.1%, at 1,896.07.

Although falling stocks outnumbered rising issues by almost 9 to 1 on the New York Stock Exchange in heavy trading, that was less severe than on Friday, when losers topped winners by about 12 to 1 -- the most lopsided margin since Oct. 27, 1997, according to data from Merrill Lynch & Co.

Such extraordinarily broad sell-offs often signal that a decline is ending, at least for the short term, said Richard McCabe, chief market analyst at Merrill Lynch in New York.

“It does appear that the current market correction is reaching the all-inclusive, no-place-to-hide condition that is usually a sign of a decline being in a mature stage,” McCabe said.

Many Wall Street pros say the profit taking in recent weeks was overdue in sectors that had led Wall Street’s sharp advance over the previous 12 months.

The so-called SOX index of 18 major semiconductor stocks has fallen 11.5% since April 5, and is down 18.1% from its 2004 peak reached on Jan. 12. Last year, the index rocketed 76%.

A Bloomberg News index of 153 real estate investment trust shares has dived 18.5% since April 1 after soaring 42% in the previous 12 months.

“The selling is relieving a lot of the excessive optimism” built up in the market over the last year, said Tim Hayes, senior equity strategist at market research firm Ned Davis Research in Nokomis, Fla. “This is healthy.”

Since 1900, the average initial pullback in the Dow index after extended rallies has been 9% before the market began another climb, Hayes said. So shares still could fall further in the near term while remaining in a longer-term bull market, he said.

He expects many stocks to go higher after this decline because the economic fundamentals “still look very favorable.”

Robert Bissell, president of Wells Capital Management in Los Angeles, said he also was an optimist. “The economy is doing really well,” he said. Even if interest rates rise, he said he expects that “looking out a year or two, I think we’re going to be in a pretty good environment for stocks” if corporate earnings continue to rise.

Bissell said he was sticking with shares of firms that could benefit from continued economic growth, including issues in such sectors as financial services, technology and heavy industry.

But other analysts say the stock market may be unable to overcome the negative effects of higher interest rates.

“I think the bull market is over,” Boockvar said. At best, stock prices overall may flatten out for a while, but major indexes won’t return to their old highs anytime soon, he said.

A major problem for Wall Street is that investors have no sense of how high the Federal Reserve might push short-term interest rates once it begins to tighten credit, some analysts say.

The Fed last week said it can be “measured” in raising rates, but with its key short-term rate at a 46-year low of 1%, the perception is that rates could rise a lot in a strong economy.

The yield on the benchmark 10-year Treasury note, which surged to a 22-month high of 4.77% on Friday from 4.60% on Thursday, continued to edge up Monday, closing at 4.79%.

Robert Gay, fixed-income strategist at Commerzbank Capital Markets in New York, said there probably still were many investors who own bonds and want to sell, figuring they can lock in higher yields later this year or in 2005.

That view could become self-fulfilling, he said. “There’s no place to go but up in yields,” Gay said.

Among Monday’s market highlights:

* Industrial stocks were among the day’s biggest losers. Caterpillar slid $4.24 to $72.88, Deere fell $2.17 to $64.70 and Ingersoll-Rand lost $3.03 to $60.96.

But in the commodity sector, Alcoa added 32 cents to $29.46 and copper miner Phelps Dodge was up $1.37 to $62.62.

* Energy stocks fell as oil prices pulled back from 13-year highs after Saudi Arabia’s oil minister called for higher production. Exxon Mobil lost $1.20 to $42.05 and Amerada Hess was off $2.42 to $69.15.

* Banks and home builders were broadly lower on interest rates worries. But some big-name technology shares attracted buyers. Intel added 8 cents to $26.55 and Microsoft was up 15 cents to $25.93.