NEW YORK -- Don't expect the gloom to lift any time soon as U.S. stocks marked the Nasdaq's record high a year ago Monday, slumping to a 27-month low, with a resilient U.S. economy knocking the wind out of investor hopes for a deep interest rate cut.
Talk of a global recession and mass layoffs have replaced last year's momentum buying that ignored corporate earnings or stock valuations and drove stocks to record highs. Investors had hoped lower interest rates would cut corporate and consumer borrowing costs, and spur stock prices. But recent pockets of U.S. economic strength have cast doubt on the Federal Reserve's efforts to revive the economy by cutting interest rates.
"There is some confusion about how much flexibility the Fed has in terms of lowering interest rates with recent data showing some strength in the economy," Hank Herrmann, chief investment officer with Waddell & Reed of Overland Park, Kan., with $36 billion in assets under management.
The Nasdaq Composite Index tumbled 129, or 6.3 percent, to 1923.78 on Monday, the first it fell below the 2000 mark since mid-December 1998. The Nasdaq set an all-time closing high of 5,048.62 on March 10 last year.
Meanwhile, the Dow finished down 436 points, to 10,208.
On Friday, the U.S. jobs market showed surprising resiliency in the face of the weakening economy, deflating hopes that the central bank would cut interest rates by a hefty 75 basis points to spark an economic recovery.
That, together with a devastating parade of earnings warnings and rumblings of a global slowdown, have made equities about as popular an investment as a dot-com start-up.
"There has been a whole host of disappointing fundamental company announcements -- earning, layoffs ... and all of those things seem to be coming together all at once. The idea that a synchronous global recession is jumping up," Herrmann said.
Early Monday, Morgan Stanley Dean Witter's top economist Stephen Roach raised the question of a recession spreading across national borders, a reminder of the growing interconnection of the world's markets and economies.
"As cuts in both capital and labor intensify, income generation and consumer demand will eventually be hit. And then the American consumer will no longer be on the outside looking in at a gathering recession," he told clients in a research note titled: "Synchronous Global Recession?"
The "warning shot" of a possible U.S.-engendered slowdown in Europe, he said, is a "gathering slowdown in Germany -- the nation with the greatest exposure" to the United States.
"Europeans are starting to concede that there's probably more to come," Roach said. "After all, fully 15 percent of Euroland GDP goes to exports, a greater external exposure than either the U.S. or Japan."
Japan's troubled economy telegraphed another high-profile symptom around the world Monday: the Nikkei stock average plunged to a 16-year closing low partly on skepticism over an economic package unveiled by the country's ruling coalition.
Bear Stearns chief economist Wayne Angell said that Federal Reserve Chairman Alan Greenspan will likely cut interest rates only by 50 basis points at its next policy meeting on March 20, saying that "would still leave the Fed well behind the curve."
Angell, a former Fed governor, added he does not see any evidence that the manufacturing sector is bottoming in the first quarter, which risks pushing back a rebound in overall economic activity until the fourth quarter.
Adding to Wall Street's sour mood, Ed Kerschner, UBS Warburg's chief portfolio strategist and Wall Street's No. 1 rated strategist, cut his 2001 earnings outlook for companies in the Standard & Poor's 500 Index by 3.5 percent because of a drop in manufacturing activity and cuts in corporate spending.
"It (a 50 basis point cut) will arrest some of the fear, but it takes a long time for monetary policy to really influence economic activity," said Dick Schmaltz, director of investment at J. & W. Seligman Inc, New York. He overseas the about $34 billion in investments.
"So this momentum is going to continue on a while longer, it just won't be so vicious on the downside," he added.
Jon Brorson, director of equities at Northern Trust, Chicago, with $350 billion under management, said market rallies have had little staying power because they are a chance for investors to get out of technology stocks bought during price peaks.
"I don't think it is going to do better for a while. We are going to go through some more pain and suffering. There is so much of the tech junk out there. The portfolio managers are saying, 'Give me any rally to offload these things.'"
"People are so long (technology shares) and they have not coughed up the stuff. There is so much tech stock out there," he said.
As for Monday sharp decline, PNC Advisers chief investment officer Donald Berdine said relatively low volume indicated the pain will persist.
"It looks to me like there is not huge volume, so I am not sure it is a capitulation stage for the market. It looks like buyers are reluctant to step in," said Donald Berdine, chief investment officer with PNC Advisers of Pittsburgh, with about $43 billion under management.
