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Why Wall Street is going down the tubes

April 14, 2000
Web posted at: 5:02 PM EDT (2102 GMT)

By Tony Karon

(TIME.com) -- Please fasten your seat belts and make sure your seats are in the upright position -- the turbulence that savaged Wall Street this week may be here to stay. NASDAQ had lost a whopping 300 points by midday Friday, bringing its loss over the week to 1,000 points and leaving it some 31 percent off its record high set little over a month ago. The Dow was not immune to the contagion, losing some 380 points by noon. And nobody seems confident that they can see the bottom of the sell-off: Friday's Consumer Price Index numbers projected an annual inflation figure of 5.8 percent (almost double the average of the last decade) and mixed earnings reports have prompted a rush to jettison technology stocks and financials.

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"This week's earnings reports didn't give investors the across-the-board good news they needed in an increasingly nervous market priced for perfection," says TIME business correspondent Dan Kadlec. "But the devastating factor is the news that inflation is averaging almost 6 percent for the year, because that forces the Fed to keep raising interest rates even though the stock market is crumbling. Alan Greenspan has already warned that he plans to continue raising rates, and that's terrible news for the market."

The worst news for individual investors is that the Dow and NASDAQ indices have dived in concert. "In recent weeks they had been going in different directions, and that had meant that positions in one could offset losses in the other," says Kadlec. "But now they're no longer acting as a hedge against each other in the individual's portfolio." That may be bad news for the Fed, because it could slow the economy down even more abruptly than Greenspan intends. "Americans may be frightened by the speed at which their investments are losing value, and cancel plans to spend on vacations, homes, cars and so on," says TIME senior business writer Bernard Baumohl. "And if they cut back their consumer spending, that's going to slow the economy quite dramatically." Still, the inflation numbers appear to have stiffened Greenspan's resolve to keep raising interest rates, which means the stock market may remain skittish for some time to come.

Copyright © 2000 Time Inc.