Dow Falls 71.46 on Recession, Inflation Fears

Stock prices were pummeled Friday on Wall Street as investors responded to troubling economic news and market sell-offs in London and Tokyo.

The Dow Jones industrial average fell 71.46, closing at 2,689.21, the biggest one-day drop since last Oct. 13, when the market index plunged 190.58 points. Declining issues led advances nearly 7 to 1 in moderately heavy trading of 183.88 million shares on the New York Stock Exchange.

“It was a bad day,” deadpanned Charles I. Clough, chief investment strategist at Merrill Lynch & Co. in New York. “Stocks could rally back, but we don’t think they will go back to their old highs,” at least for the next several months. The Dow set a record of 2,810.15 on Jan. 2.

Friday’s wave of selling was spurred by a host of domestic and international events that combined to make investors unusually skittish, analysts said. Among these were economic reports that signaled a higher than expected inflation rate on top of disappointing consumer spending. That fueled the market’s biggest worry--that inflation and recession could strike at the same time.

Sluggish consumer spending suggested also that corporate earnings could be even weaker than expected, according to several securities analysts.

“It was the worst of all possible worlds,” said Joseph A. Wahed, senior vice president and chief economist at Wells Fargo Bank in San Francisco. “The market just ran for cover.”

The sell-off in stocks started overseas. First, the Japanese market, which has been battered by interest rate worries, posted its biggest single-day loss since 1987. The Nikkei index fell 653.36 points, or about 1.7%, to close at 37,516.77.

The nervousness spread to London, where stock prices lost 1.6% of their value, with the Financial Times-Stock Exchange index falling 37.8 to 2,380.1--its lowest level since last November.

American investors are particularly worried about the Tokyo market because the Japanese have poured a tremendous amount of money into U.S. Treasury bills, thus helping to finance the U.S. budget deficit. The Japanese central bank recently signaled that it may raise interest rates, which would make Japanese bonds more attractive compared to U.S. Treasury issues. In such a scenario, the U.S. government might be forced to raise rates in this country, which could depress corporate earnings and stock prices.

Meanwhile, investors who have been encouraged by reforms sweeping Eastern Europe are now worried that Soviet leader Mikhail S. Gorbachev faces stiff opposition. Already, Lithuanians are demanding independence, and investors fear that Gorbachev could be ousted for a hard-line Communist leader who would stymie further economic reforms.

“It never seems to be one identifiable thing,” said Brian C. Rogers, vice president of T. Rowe Price Associates, a large mutual fund company in Baltimore. “There are concerns about what’s been going on in the Japanese market, which was very weak overnight. There are concerns about risks to Gorbachev in the Soviet Union. And, if you look at what has been happening with gold prices, you can see that people are more concerned about inflation.”

Gold typically rises when inflation fears set in, and the precious metal has staged a rally since early September. Gold closed at $414.50 an ounce Friday, near its 12-month high and up nearly 17% since September.

Adding to the turmoil Friday was computerized “program trading,” which tends to exacerbate market swings. The New York Stock Exchange briefly halted program trades Friday after one market index hit a “circuit breaker” level. When stocks prices fall below certain levels, these circuit breakers are triggered, stopping trading for brief “cooling off” periods. The idea is to curb panic selling.

Many analysts are not overly optimistic about near-term market prospects. Although many believe Friday’s economic news was not as bad as it seemed, they said that stock prices were higher than they should have been.

“I’ve felt that the market has been a bit rich for a while,” Rogers said. “If you look at basics, you can assume that stock prices are based on corporate earnings. Corporate earnings are under pressure and are probably going to be weak. So, if you asked if the market could sell off another 5% over the next couple months, I’d have to say it wouldn’t surprise me.”

Added Eric Miller, chief investment officer for Donaldson Lufkin & Jenrette in New York: “I think expectations will be in the process of being lowered over the next few weeks, and that probably means lower stock prices.”

Nevertheless, many analysts still expect the market to recover on a long-term basis.

“This may continue for a few days or weeks, but the basic forecast for 1990 is still for a modest increase in equity prices during the year,” Wahed said.

Among individual blue-chip issues, General Electric fell $1.625 to close at $63.125; International Business Machines lost $2 to $97.875; Coca-Cola was down $2.75 to $73.625; Du Pont dropped $2.625 to $123.25, and Philip Morris slipped $1.25 to $38.75.

According to Wilshire Associates’ index of more than 5,000 actively traded stocks, the overall market lost $77.14 billion, or 2.28%, in value. The Standard & Poor’s 500-stock composite index was down 8.60 at 339.93.

The New York Stock Exchange’s composite index dropped 4.46 to 188.32. The NASDAQ composite index for the over-the-counter market slumped 9.14 to 439.72. At the American Stock Exchange, the market value index closed at 372.23, down 7.12.