Stocks declined across a broad front Monday after traders began switching to safer, higher quality issues in the wake of the collapse of the British investment bank Barings PLC.
The Barings fiasco, allegedly precipitated by a 28-year-old employee in Singapore who lost upwards of $1 billion in speculative trading, created deep unease. On its own merits, or lack of them, the scandal should have little effect on world financial markets beyond scuttling Barings as an independent bank.
But traders worried there may be similar scandals lurking within the bowels of other financial institutions that operate in the international marketplace, often with too little control over extended operations and sometimes with youngsters in charge of too much money. If banks pull back from international operations, it could shrink the money pool available for investment in developing economies.
Most markets around the world dipped in initial trading as a result of the Barings bust, then started to recover. But as the day wore on, worries increased.
The Japanese market, the object of the speculative trading by the Barings employee, never came back. The Nikkei 225 average plummeted 3.8 percent to 16,808. At the same time, the Mexican market, beset by a new round of worries over the Mexican government’s failure to come to grips with the country’s worsening economic crisis, dropped by nearly 5 percent.
In the U.S., the Dow Jones industrial average took a steep dive at midday, at one point dropping more than 36 points, then spent the rest of the afternoon struggling back.
Dow industrials closed down 23.17 at 3988.57, the first decline since a 33.88-point loss Feb. 17. For the previous three trading days the Dow had held in record territory above the 4000 mark.
The Nasdaq index lost 6.58 points to close at 784.50.
While the loss wasn’t particularly steep, it was broad. There were 1,608 losing stocks, compared with 632 gainers, on the New York Stock Exchange, the biggest disparity since decliners beat advancers by 1,272 stocks on Dec. 8.
Volume wasn’t unusually heavy-about 288 million shares on the Big Board. Many investors sat out the session ahead of this week’s scheduled release of major economic reports, said Hugh Johnson, chief investment officer for First Albany. Among those are the Conference Board’s Consumer Confidence Index, due Tuesday, and the National Association of Purchasing Management’s survey, due Wednesday.
Indexes on foreign exchanges generally wound up lower. Britain’s FT-SE 100 Index fell 12.4 to 3025.3, Milan’s MIB Telematico Index dropped 112 to 9896, Germany’s DAX Index slipped 19.39 to 2099.25, while Hong Kong’s Hang Seng Stock Index slid 1.12 percent to 8126.65.
Kevin Means, chief of equities at Aetna Life Insurance and Annuity, said the Barings’ collapse does not represent a “long-term” problem for U.S. equities. It does, however, “again raise the flag that senior management really doesn’t know how to oversee these kinds of risky investments.”
“This is the type of out-of-the-blue news that will create a hurdle for the market to overcome,” said Alfred Goldman, a market analyst at A.G. Edwards.
“The big question now becomes how many of these little time bombs are ticking away in banks throughout the world, and when will they erupt,” said John Gardner, chief investment strategist at Van Liew Capital.
Financial services, which have enjoyed a runup lately, took some of the heaviest hits. First Chicago slipped $1.25 to $49.87, Bankers Trust New York fell 75 cents to $62.75, J.P. Morgan & Co. lost 50 cents to $63.62, First Fidelity Bancorp dropped 62 cents to $50, Dean Witter Discover & Co. slumped $1 to $29.62, Merrill Lynch & Co. weakened 62 cents to $40.37 and Travelers dropped 62 cents to $39.12.
It was a bad day all around for the financial community’s accounting practices. Salomon fell 87 cents to $35.87 after the New York-based company said it uncovered more charges from accounting errors, which increased its 1994 loss 10 percent to $399 million. The firm failed to keep proper track of all its transactions, a company official said.
U.S. bonds became an investment of choice as traders began a migratory flight from stocks to less risky, higher yielding alternatives.
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“This is the first bona fide flight to quality we’ve seen in quite some time,” said Mark Byers of Indiana Corporate Federal Credit Union in Indianapolis. A flight from riskier securities could “sustain the momentum for U.S. bonds a little while longer,” Byers said.
The benchmark 30-year Treasury government bond climbed $5 per $1,000 bond, pushing its yield down to 7.47 percent from 7.52 percent Friday, the lowest since Sept. 1. Bond prices and yields move in opposite directions.
At the same time, mutual fund companies reported sales of bond funds in February were the highest in more than a year as evidence mounts that this cycle of interest rate hikes has crested. Sales for the previous three months were among the worst since the October 1987 stock market meltdown.
The flight to bonds has been accompanied by a flight out of so-called cyclical stocks, those with products whose sales fluctuate with the business cycle. In Monday’s trading, General Electric, Aluminum Co. of America and International Business Machines were the biggest losers among the Dow industrials. GE fell $1.12 to $53.62 after the Supreme Court allowed 38 Philadelphia residents to go ahead with their suit to recover damages for environmental contamination at a local railroad yard. GE is one of seven defendants in the case.
Michael Metz, chief market strategist at Oppenheimer, expects lower corporate earnings to follow the past year’s seven hikes in interest rates, designed to bring in the economy for a “soft landing.”
“The optimistic earnings expectations for the balance of 1994 and for 1995 may be too high,” Metz said.