Stock Plunge Gives Investors The Jitters Is This A Simple Market ‘Correction’ Or The Start Of A Sustained Decline? Only Time And The Reaction Of New Investors Will Tell

The U.S. stock market was pounded by another wave of heavy selling Monday, triggering fresh warnings about a sustained deep decline and raising concerns about the reaction of millions of relatively new, untested investors.

In a sell-off that appeared to have no single catalyst, the Dow Jones industrial average of blue-chip stocks plunged 161.05 points, or 2.9 percent, to 5,349.51, its lowest level since late January.

Smaller-company stocks, which had led the market in a wild rally in April and May, suffered substantial losses that drove the Nasdaq composite index of such issues down nearly 4 percent and back almost to its level of Jan. 1.

Analysts said Monday’s tumble was rooted in the same worries over rising interest rates and falling corporate profits that had fueled last week’s market decline, which sliced 3.2 percent from the Dow between July 5 and Friday.

Many experts suggested that, despite the apparent violence of the selling in recent days, the market could be experiencing nothing more than a historically typical “correction” that could shave as much as 10 percent from the value of the average big stock before prices stabilize.

But concern also is growing that precisely because this bull market has gone so long without such a 10 percent pullback - 5-1/2 years - Wall Street’s sudden mood change could unleash a torrent of selling by institutional and individual investors eager to take away some of their profits.

“When you go up in a straight line, you can go down in a straight line,” warned Richard McCabe, market analyst at Merrill Lynch & Co. in New York, noting that stock prices had surged spectacularly just over the past 18 months, adding to gains since October 1990.

Major mutual fund companies, which in recent years have taken in record sums from individual investors eager to participate in the long bull market in stocks, reported only mild redemptions Monday, indicating that most individual investors appear unfazed so far by the market’s decline.

But with many analysts warning that eroding confidence in stocks is posing the biggest challenge yet to Wall Street’s long up trend, the actions of mutual fund investors may be key in coming days and weeks to the market’s direction.

The Dow’s loss Monday was its fourth-biggest ever in terms of points, but in percentage terms the loss did not rank even among the index’s 10 worst days.

Still, Monday’s decline compounded stocks’ broad pullback since July 5, when the government reported a surge in new jobs in June, driving interest rates sharply higher and fueling worries about an overheating economy.

Then last week, a flurry of weaker-than-expected second-quarter profit reports from some well-known U.S. companies spurred renewed selling, as investors feared that the boom in corporate earnings that has supported the 1990s bull market might be ending.

On Monday, jitters over corporate profits were intensified when major airlines launched another fare war, hammering most airline stocks.

“A lot of people have made a lot of money over the last four to five years,” said Howard Gleicher, a money manager at Palley-Needelman Asset Management in Newport Beach, Calif. “Now they’re afraid that things are going to change.”

Ricky Harrington, a veteran market analyst brokerage Interstate/Johnson Lane in Charlotte, N.C., estimated that “80 percent of our brokers have only been in this business for the past three to five years. They haven’t seen a real (sell-off) in stocks,” and thus their behavior in the face of deep pullback is unpredictable, he said.