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Dow Plummets 512 Points; Market Edges Toward Bear

By James F. Peltz
Los Angeles Times
New York

The stock market's summer swoon turned into a dramatic rout Monday as the Dow Jones industrial average plunged more than 500 points, its second-worst point drop in history. Stocks now teeter on the edge of their first bear market since 1990.

The financial blood bath was even worse in the market's glamorous high-technology arena, where some of the biggest names in computer, software and telecommunications stocks - such as Microsoft and Dell Computer - were hit with waves of selling.

That rattled many other investors, because those stocks were the last pillar of strength in a market that's already been dragged sharply lower in recent weeks by the economic woes in Asia, Russia and elsewhere around the globe.

Over that span, more than $2 trillion of U.S. stock market wealth has vanished.

And what happens next likely will depend less on Wall Street's movers and shakers than on millions of individual American investors and their response to the market's wrenching pullback - something many of them have never witnessed, analysts said.

The market's direction could ride on whether Main Street keeps buying stocks during this market drop, as it has during recent pullbacks, or starts selling in a big way, they said.

The familiar Dow Jones average of 30 blue-chip corporate stocks plummeted 512.61 points to 7,539.07, a point loss second only to its 554.26-point drubbing last Oct. 27.

But as only the 25th worst percentage decline in the Dow, this wasn't a crash. Because the market has been so high - it seems hard to believe, but stocks set historic highs only six weeks ago - the 6.4 percent loss Monday fell well short of crash proportions. The "Black Monday" debacle of Oct. 19, 1987, for instance, amounted to a 22.6 percent plunge.

That was little comfort to the market, however. The Dow Jones industrials - which have skidded 1,060 points in just the past four trading days, to the lowest level since last Nov. 13 - and other, broader measures of the market have now surrendered all the gains they had recorded earlier this year and then some.

In other words, many investors - either through their personal holdings or their retirement plans, such as 401(k) accounts - are losing money in stocks in 1998, a setback they haven't encountered in years.

Moreover, Monday's decline pushed the market to within a whisker of what many experts consider an official bear market - one that has dropped 20 percent or more from its recent highs - for the first time since the Gulf War market of 1990. The Dow Jones industrials, for example, have now skidded 19.3 percent since hitting a record high 9,337.97 on July 17.

The falloff since mid-July has been fueled by worrisome events overseas, including deep recessions across Asia and the Russian economic and political crisis. Some analysts said Monday's drop was sparked by Russian lawmakers' blockage of the formation of a new government.

But others said the heavy selling of Dell Computer and other big-name tech stocks was the key.

"These first-tier stocks had led the market's rise, and now they're being hit by nervous investors despite the fact that the fundamentals of these companies are still strong," said Alan Skrainka, chief market strategist at the investment group Edward D. Jones & Co. in St. Louis. "It was another crack in the dike."

Treasury Secretary Robert Rubin, seeking to calm an increasingly nervous marketplace, said he had spoken with President Clinton, Federal Reserve Chairman Alan Greenspan and with officials around the world.

Clinton was en route to Moscow for a summit with beleaguered Russian President Boris N. Yeltsin, while Rubin and Greenspan are to meet Friday in San Francisco with Japanese Finance Minister Kiichi Miyazawa about the lack of economic reform in Tokyo that underlies much of the uncertainty rippling across the globe.

"The fundamentals of the United States economy are strong" and the "prospects for growth, low unemployment, low inflation continue to be strong," Rubin said.

Then why is all of this happening?

Stocks had surged in recent years on the shoulders of continued profit gains at U.S. corporations. That was especially true of fast-growing computer and technology stocks. They also were supported by good economic growth and low inflation.

But this summer, that outlook for higher profits dimmed because of the mounting problems in Japan, other Asian nations and, more recently, in Russia.

In light of those problems, investors viewed stock prices as having climbed too high - and they began selling with force this year. Small-company stocks went first, then the larger industrial companies and major banks, and finally the blue-chip technology stocks on Monday.