The Dow Jones industrial average suffered the second-biggest point loss in history Monday, more than wiping out all of this year's gains. The technology-dominated Nasdaq composite index had its worst-ever point drop.
Some questions and answers about what happened and what investors should do:Question - What's going on?
Answer - The Dow industrials, which hit a record 9,337.97 on July 17, has since tumbled almost 1,800 points, a plunge of 19.3 percent that has accelerated in the past week. On Monday, the Dow plummeted 512.61 to close at 7,539.07, a level last seen in November 1997. While it was second only to the 554.26 points lost on Oct. 27, 1997, it was only the 25th worst daily drop in percentage terms, at 6.4 percent.
Quesiton - Why is this happening?
Answer - Market analysts say investors have changed their outlook on stocks. Rather than looking at declines as buying opportunities, many are now waiting for any gains as a chance to sell and put their cash aside until the storm blows over.
Question - Why is that?
Answer - There has been concern that with the economy slowing down after a seven-year expansion and markets overseas cooling off because of the fallout from a still potent Asian crisis, corporate profits will dry up. In addition, there are worries about the unprecedented rise in share prices that have left some high-flying stocks selling so far above their dividend earnings that price-earnings ratios that defy conventional benchmarks.
Adding to the uncertain investment climate, Monday's stunning selloff came as Russia's parliament rejected Boris Yeltsin's choice for prime minister at a time when that economy is unraveling. There are fears the economic crisis will next spill over to Latin America.
Question - Why should U.S. investors be concerned about Russia?
Answer - While Russia is not a big business partner of the United States, U.S. banks and companies do lots of business with countries in eastern and western Europe, like Germany, which are heavily tied to Russia.
More broadly, Russia's problems come as Asia is still beset with financial crises. Japan is in a deep recession, and there is growing doubt about the new government's resolve and its ability to revive the country.
Taken together, these events have brought about a crisis of confidence in world leadership, including in President Clinton, whose political strength is being sapped by the Monica Lewinsky controversy.
Question - Dell Computer fell $18.75 a share Monday, Microsoft tumbled $9.25. Why did investors dump technology stocks?
Answer - Investors sold some of the best performers in their portfolios, including technology stocks. But they sold other blue chips as well, market stalwarts like drug companies, consumer products like Coca-Cola. These are usually considered the family "jewels," the last to jettison before the enemy hits the door. Many were hoping to cut their losses and recoup as much of their investment as they can, then ride out the storm.
Question - What do analysts think will happen now?
Answer - Many analysts believe the market needs to be wrung out a bit more before it can begin to recover. A drop back to 6,800 to 7,000 in the Dow, which would represent a loss of up to 740 more points, is not unthinkable, said Barry Hyman, senior market analyst at Ehrenkrantz King Nuss-baum.
At this point, small investors should consider if they will lose too much by selling now, says Dick McCabe, a technical analyst at Merrill Lynch. Instead, said Barry Hyman, senior market analyst at Ehrenkrantz King Nussbaum, they should wait out the storm and resume buying stocks only when they see companies buying back their own shares and only after market bellwethers, such as bank stocks, start to turn around.
When investors do come back, they should "buy the very best," advised A. Marshall Acuff, market strategist at Salomon Smith Barney. It will not be a time to be holding lesser-quality shares.