Street off to wild start, even without Y2K woes

More market reaction expected when Fed tackles interest rate issue again

By Eileen Glanton,
Associated Press, 1/9/2000

NEW YORK - The transition from 1999 to 2000 was stunning in its smoothness. Defying many predictions, the millennium arrived with no major computer troubles or apocalyptic natural disasters.

On Wall Street, where trading continued without a glitch, the good news about Y2K provided no comfort. In fact, investors viewed the lack of computer problems as justification for a huge sell-off, beginning 2000 in dramatic fashion.

Y2K worries had provided a useful function to the markets at the end of 1999. The Federal Reserve opted against raising interest rates in December, hoping to ensure monetary stability amid any Y2K problems. The Fed had already increased rates three times in 1999, trying to keep the economy's rampant growth from reaching inflationary levels.

Most reports indicated that the economy continued to flourish in December, leading economists to believe that the Fed's decision to wait until Y2K issues were resolved amounted to a free pass.

Now, the free pass has expired, analysts say.

''Once investors realized that Y2K was a complete nonevent, expectations for Fed policy began to shift quickly,'' said Dan Bernstein, director of research at Bridgewater Associates.

Economists last week said a quarter-percentage point increase at the Fed's next meeting, on Feb. 1 and 2, is all but guaranteed.

A growing number of experts believe the Fed will raise rates as much as a half-percentage point. And if the economy continues its rapid growth, many analysts expect a series of three or four increases, to cool the economy off.

''A quarter-point increase in February will not stop the economy,'' said Larry Rice, chief investment officer at Josephthal & Co. ''It's much too strong for that.''

Further rate hikes would undoubtedly flatten corporate profits, though, sending a chill through the stock market.

And so the prospect of rising interest rates contributed to a 359-point loss for the Dow Jones industrials and a 229-point plunge for the technology-dominated Nasdaq Composite index on Tuesday.

But as the week wore on, investors proved they were still willing to buy.

The surprise: They sought out old-fashioned bargains in the utility and consumer goods sectors, to the exclusion of last year's high-flying technology favorites.

For example, Qualcomm, the best performer in the Nasdaq last year, tumbled 25 percent last week, while Caterpillar rose 27 percent.

That was partially a defensive move toward companies that benefit from strong economic growth, analysts said. But for the most part, the plunge in technology shares was merely an overdue bout of profit-taking, said Charles Pradilla, chief investment strategist at SG Cowen Securities.

''The Nasdaq Composite was up more than 85 percent last year,'' he said. ''A lot of these stocks were very frothy.''

In three days, the Nasdaq Composite fell 9.8 percent, close to the 10 percent level that most Wall Street professionals would dub a correction.

Pradilla said the Nasdaq could drop as much as 20 percent from its Jan. 3 record high without stimulating undue fear.

Analysts said investors held onto their best-performing stocks in November and December for two main reasons. First, investors who didn't sell before Dec. 31 can delay paying taxes on their gains until April 2001.

Institutional investors, meanwhile, wanted to hold on to top performers through year's end so their 1999 reports would reflect the market's best stocks.

''There was tremendous pressure on portfolio managers not to sell these stocks last year,'' Pradilla said. ''If it hadn't been for that, all this selling would have occurred much earlier.''

A resurgence in tech stocks on Friday helped the Nasdaq Composite index wipe out much of its midweek plunge. A gain of 155.49 brought the Nasdaq to 3882.62, leaving it down 186.69 points on the week.

The Dow was the only major index to finish the week with a gain, rising 25.44 points from the previous week. The Dow soared 269.30 on Friday to finish at 11,522.56.

The Standard & Poor's 500 fell 27.78 points during the week. A gain of 38.02 on Friday left the index at 1441.47.

The Russell 2000 index of smaller companies lost 16.44 during the week. On Friday, the index rose 12.97 to 488.31.

This story ran on page C02 of the Boston Globe on 1/9/2000. ) Copyright 2000 Globe Newspaper Company.

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-- John Whitley (jwhitley@inforamp.net), January 09, 2000