U.S. stocks stagger to midyear point

Advertiser News Services

U.S. stocks yesterday wrapped up their biggest first-half loss since the 1970s and led a global decline, reflecting growing mistrust of companies and their executives and concern that a rebound in earnings may slow.

"The malaise is broadly based," said Alan Brown, chief investment officer at the world's biggest money manager, State Street Global Advisors, with assets of $806 billion. "I suspect we're not going to get out of this much before next year."

Misdeeds such as Arthur Andersen LLP's obstruction of justice in its audit work for Enron Corp., improper accounting at WorldCom Inc. that led to phony profits, and alleged law-breaking by the former chief executive officers of Tyco International Ltd. and ImClone Systems Inc. have driven some investors out of stocks.

"People are disillusioned," said Charles White, president of Avatar Associates, which oversees $2 billion. "People believe they have been getting scammed."

In just the second quarter, the Nasdaq composite index completed its worst first half since 1974, the Dow Jones industrials fell below 9,000 and both the Nasdaq and Standard & Poor's 500 dipped below the closing lows they reached following the terrorist attacks.

For the quarter, the Nasdaq has plunged 20.7 percent, while the S&P dropped 13.7 percent and the Dow sank 11.2 percent. For the year to date, the Nasdaq is down nearly 25 percent, its worst first-half performance since a drop of more than 45 percent 1974. The Dow is down 7.8 percent since Jan. 1.

The Standard & Poor's 500 Index has lost 13.7 percent this year through yesterday's close, compared with declines of 12.5 percent in 1973 and 21 percent in 1970. Almost one of every 10 stocks in the index fell by half or more. The loss followed the benchmark's 13 percent decline in 2001, and its 10.1 percent drop in 2000.

Mutual fund investors also have taken a beating, with U.S. growth mutual funds posting the biggest losses among diversified stock funds in the first half. The funds, which try to invest in fast-growing businesses, fell an average 20 percent this year through Thursday, according to research firm Lipper Inc. Funds focused on large-cap companies such as AT&T Corp., International Business Machines Corp. and Tyco dropped 18 percent.

"Big was bad," said Eaton Vance Corp. Chief Equity Investment Officer Duncan Richardson, who oversees about $23 billion. "Unfortunately for many investors, they are the most widely held stocks because they became overly popular."

Funds based on the Standard & Poor's 500 Index averaged a 13 percent decline, Lipper said. Mid-cap value funds lost 2.2 percent, and diversified stock funds averaged a 12 percent fall overall. Among sector funds, those focused on the telecommunications industry fell 41 percent, and science and technology funds lost 34 percent, Lipper said.

So far this year, U.S. stocks have lost $1.5 trillion of value, based on the Wilshire 5000 index. General Electric Co. shed $100 billion. Microsoft Corp., Citigroup Inc. and International Business Machines Corp. together lost another $200 billion.

Benchmark indexes for the eight biggest European markets all dropped. Germany's DAX Index set the pace by falling 17 percent, its steepest first-half loss since 1971.

Investors say an earnings rebound is key to stemming the decline in U.S. and European stocks.

Analysts now predict U.S. corporate earnings will increase 14 percent this year, down from a 16.5 percent estimate at the beginning of the second quarter, according to Thomson First Call. Profit fell for five straight quarters and probably rose in the second, analysts say.

In the meantime, analysts say investors are shifting assets to Asia and Europe as the U.S. dollar weakens against the regions' currencies.

The dollar fell to a seven-month low against the yen and touched a two-year low against the euro, shared by a dozen European countries.

Associated Press and Bloomberg News Service reports were included in this story.