- The Washington Times - Tuesday, August 5, 2003

NEW YORK (AP) — Investors shaken by a terrorist attack overseas and a turnaround in interest rates sent stocks sharply lower yesterday, propelling the Dow Jones Industrial Average down nearly 150 points in their worst day in 2 months.

Downbeat outlooks from Gillette and Costco added to the market’s gloom, but analysts said much of the selling was attributable to a growing realization that interest rates are again climbing.

“Portfolio managers have decided to back away. They have lost their nerve,” said Hugh Johnson, chief investment officer at First Albany. “They are asking, ‘Will the rise in interest rates impact consumer spending and business spending?’ It may very well.”

Analysts also attributed the losses to a powerful car bomb explosion outside the Marriott hotel in downtown Jakarta, Indonesia, yesterday. The explosion, an apparent suicide attack, killed 13 persons and wounded 149 — including two Americans.

“To some extent, the markets continue to be shocked by acts of terrorism. Of course, we got another one today,” Mr. Johnson said.

The Dow closed down 149.72, or 1.6 percent, at 9,036.32, its biggest one-day point loss since May 19, when it shed 185.58.

The broader market also had steep losses. The Nasdaq Composite Index dropped 40.56, or 2.4 percent, to 1,673.50. The Standard & Poor’s 500 index fell 17.36, or 1.8 percent, to 965.46.

“It really has to do with the fear that a lot of people have that the rise in interest rates is going to be a detriment to economic momentum,” said Ned Riley, chief investment strategist at State Street Global Advisors.

Since the middle of June, the 10-year Treasury note has risen to about 4.3 percent from just over 3 percent, largely because of signals that the economy is rebounding and the Federal Reserve is being less aggressive.

“The market today is reflecting that it has been shocked — shocked by a sharp rise in interest rates. [That shock] siphons off money from stock market, into the bond market and generates worries about the stock market and earnings,” Mr. Johnson said.

Analysts said investors are worried that stock prices have climbed too high, too fast. And, stocks have risen significantly from their March 11 lows for the year. Despite recent selling and through yesterday’s session, the Dow remains up 20.1 percent, while the Nasdaq is still up 31.6 percent and the S&P; is up 20.6 percent.

In economic news, the Institute for Supply Management reported that its non-manufacturing index for July rose to 65.1 from 60.6 in June. Economists’ forecast called for a reading of 56.0. A reading above 50 indicates growth in economic activity, while a reading below 50 points to contraction.

But outplacement firm Challenger, Gray and Christmas reported that the labor market continued to erode in July, according to a report by Dow Jones Newswires. The firm counted 85,117 planned job cuts in July, up 43 percent from the 59,715 jobs lost in June.

Analysts predict stocks will give ground during August, typically a slow month on Wall Street as investors await the next batch of economic news due out in the fall and as traders take summer vacations.

Costco Wholesale dropped $6.90, or 18.5 percent, to $30.06 after cutting its earnings estimates for the rest of the year. The discount retailer cited higher health care and workers’ compensation costs along with greater operating expenses in the first eight weeks of the current quarter.

The profit warning overshadowed Costco’s upbeat same-store sales for July. Last month’s same-store sales, those at stores open at least one year, rose 8 percent. The warning also hurt rival BJ’s Wholesale Club, which fell $1.95 to $17.24.

Gillette declined 16 cents to $30.21 after bearish comments from the company — the consumer-products maker said it was losing market share in the razor blade business to Schick and that could cut into 2003 and 2004 earnings. That news eclipsed second-quarter earnings that beat analysts’ expectations by 4 cents a share.

Cisco Systems fell 40 cents to $18.86 ahead of fiscal fourth-quarter results due out later yesterday. After the market closed, the networking company reported profits of 15 cents a share, meeting Wall Street’s expectations. Still, Cisco lost 90 cents in the extended-hours trading session.

Declining issues outnumbered advancers more than 2-to-1 on the New York Stock Exchange. Volume was light at 1.30 billion shares, just above Monday’s 1.29 billion.

The Russell 2000 index fell 7.32, or 1.6 percent, to 460.45.

Overseas, Japan’s Nikkei stock average finished yesterday down 0.7 percent. France’s CAC-40 rose 1.5 percent, Britain’s FTSE 100 gained 0.5 and Germany’s DAX index advanced 1 percent.

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