Posted on: Friday, September 20, 2002

Stocks drop in bad-news market

By Neil Irwin
Washington Post

The stock market yesterday dropped to its lowest levels since July, amid worries about corporate earnings, a decline in new housing construction and the economic impact of a war in Iraq.

The Dow Jones industrial average fell 230.06 points, 2.8 percent, to 7,942.39, closing under the 8,000 level for the first time since July 25.

The Nasdaq composite index dropped 35.68 points, or 2.8 percent, to 1,216.45. And the Standard & Poor's 500-stock index fell 26.14 points, 3 percent, to 843.32.

"There was a consensus building as recently as four or five week ago that third-quarter earnings might show some very encouraging signs," said Stanley Nabi, managing director of CS First Boston Asset Management. "Day by day, that expectation is becoming deflated."

The damage was particularly hard in the technology industry, after Electronic Data Systems Corp. cut its earnings forecast. While some analysts had thought those forecasts were too optimistic, the warning increased fears that EDS' competitors and other tech firms will have similar hard times meeting their targets.

"I see no signs of tech coming back," said Henry Herrmann, chief investment officer of Waddell & Reed. "In fact, I'm seeing signs of it having another leg down."

EDS stock plummeted on the news, falling $19.26 to close at $17.20. Other stocks caught in the downdraft included IBM, which fell $4.75 to close at $64.80.

Financial services firms lost value after Morgan Stanley said its profit fell in the third quarter to well below analysts' expectations and J.P. Morgan said its third-quarter profit will be lower than expected.

But the carnage wasn't limited to industries that are already ailing. Investors drove down the stocks of home builders, which have been one of the few bright spots through the economic slump of the past two years. It came on news that U.S. housing starts fell in August for the third month in a row.