FINANCIAL MARKETS : Dow Drops 82.94 on Tax Worries : Market Overview

- Blue chip stocks plunged like a millstone in water amid concerns that possible tax increases by President Clinton will stunt economic growth and corporate profit.

- The dollar fell sharply in hectic trading, following the stock market lower, while gold prices surged.

- Long-term government interest rates rose in late trading.

Stocks

The retreat was the market’s biggest one-day decline in 15 months in the wake of President Clinton’s call for higher taxes.

The Dow Jones industrial average closed near its lows for the day, falling 82.94 points to 3,309.49. It was the largest drop in the average since the Dow lost 120.31 points on Nov. 15, 1991.

Declining issues outnumbered advances in the broader market by about 9 to 2 on the New York Stock Exchange. Big Board volume soared to 332.85 million shares, from the previous session’s 216.81 million shares.

Meanwhile, NASDAQ composite index plummeted 25.15, or 3.64%, to 665.39. It was the biggest decline in terms of points since Oct. 26, 1987.

The selling followed tough talk from President Clinton late Monday, when he indicated that most Americans will probably end up paying higher taxes to help cut the deficit.

“The market was nervous following Clinton’s remarks,” said Dudley Eppel, managing director of equity trading for Donaldson, Lufkin & Jenrette Securities Corp.

Rattled investors worried that higher taxes for middle-income Americans could hurt hopes for a strong and long-lasting economic recovery.

The Oval Office address offered a preview of the Administration’s package of remedies for the economy. Clinton will unveil the measures tonight in a speech to a joint session of Congress.

“The President is proposing a serious fiscal drag on the economy by increasing revenues rather than cutting spending,” said Michael Metz, investment strategist for Oppenheimer & Co.

On Tuesday morning, a market circuit breaker kicked in. When the Dow drops or rises 50 points in a session, restrictions are placed on a form of computerized trading known as index arbitrage, which many believe worsened the stock market crash of 1987. The circuit breaker was implemented in 1990.

Among the trading highlights:

- Drug stocks helped lead the market lower. Investors worried that Clinton’s health care reforms could crimp company profits. Merck was down 2 1/2 to 37 7/8, Glaxo was down 1 to 18 3/4, Bristol-Myers Squibb was down 2 3/8 to 56 5/8, Johnson & Johnson fell 2 3/8 to 42 5/8, and Pfizer was down 4 1/8 at 60 1/8.

- Transportation stocks also brought down the market, in part over concern an energy tax could raise fuel costs. Consolidated Freightways, a trucking stock, fell 1 1/8 to 19 1/8, United Airlines dropped 6 1/2 to 119 1/2, and American Airlines fell 2 1/4 to 60 3/4.

- Among retailers, Nordstrom shares fell 2 5/8 to 38 1/2, and May Department Stores fell 4 to 69 3/4.

- In other actively traded NYSE stocks, Chrysler was down 3 3/8 to 36 1/2, and General Motors was down 2 to 38 5/8. RJR Nabisco was down 5/8 to 8 5/8, and Home Depot was down 3 3/8 to 60 1/2.

- On the NASDAQ, technology and health care stocks took a beating. Intel Corp., the computer company, fell 5 1/8 to 105 7/8, Cisco Systems, another computer concern, slipped 4 5/8 to 81 3/4, and U.S. Healthcare dropped 2 5/8 to 45 3/4.

U.S. financial markets were closed Monday for Presidents’ Day.

Overseas, shares in London closed sharply lower, dragged down by a selloff in the United States. The Financial Times 100-share average closed 33.7 points lower at 2,812.2. In Frankfurt, the DAX index of 30 leading shares ended fractionally lower at 1,664.22, down 0.49. Tokyo’s 225-share Nikkei average fell 201.67 points, or 1.18%, to 16,916.32.

Currency

The dollar-selling began overnight in Europe, where traders began assessing President Clinton’s economic plans.

“The dollar just followed the Dow,” said Frank Pusateri, a vice president at the Bank of Boston. “Clinton’s package is 100% of what’s (driving) the market.”

But he noted that “there’s not any direct correlation economically or realistically” between the dollar and the stock market. It’s more of a psychological connection.

Analysts were quick to stress that the underlying sentiment toward the dollar remained positive. The U.S. currency has gained ground in recent weeks after interest rates began declining in Europe. And with many European economies still depressed, interest-rate differentials are expected to remain in the dollar’s favor.

The dollar closed in New York at 119.93 Japanese yen, down from 120.65 yen on Friday.

The greenback settled at 1.629 German marks, down from 1.655. The British pound rose to $1.450 from Friday’s $1.421.

Credit

Treasury bond prices were mixed in moderate trading, with the long-term maturity retreating from last week’s gains on several major trades.

The yield on the Treasury’s main 30-year bond rose to 7.14% from 7.12% on Friday. Its price was off 9/32 point, or $2.81 per $1,000 in face amount. Bond prices and yields move in opposite directions.

Analysts said the bond market appeared to be little affected by turmoil in the stock market.

Roger Young, manager of government securities trading at Fidelity Capital Markets, said several major selloffs helped push down the price of the main 30-year bond.

“Some people are attributing the (bond market) drop to dissatisfaction with Clinton’s economic plan, but it was really just a trade situation,” he said.

Roger A. Froehlich, president of Technical Dimensions, a Mt. Kisco, N.Y., bond advisory service, said the bond was “overbought” after last week’s quarterly refunding auction by the Treasury and “we’re in the midst of a correction.”

The federal funds rate, the interest on overnight loans between banks, was unchanged from late Friday at 3.0%.

Commodities

The stock market’s plunge sent shock waves through the gold, cattle and grain markets Tuesday, and crude oil prices tumbled amid skepticism about an OPEC agreement to trim production.

On New York’s Commodity Exchange, gold for February delivery jumped $3.40 to $333 an ounce. March silver futures rose 2 cents to $3.712 an ounce.

Meanwhile, light, sweet crude fell 45 cents to $19.53 a barrel on the New York Mercantile Exchange after bickering ministers of the Organization of Petroleum Exporting Countries agreed to cut OPEC’s output of crude by 1.5 million barrels a day starting March 1.

Market Roundup, D6