updated 3/11/2004 9:00:37 AM ET 2004-03-11T14:00:37

Stock indices tumbled Wednesday, with the Dow Jones industrial average and the Nasdaq Composite index sinking to new 2004 lows, as investors worried that stocks may be overvalued and mulled data showing a record trade deficit in January, which renewed concern about the sustainability of the economic recovery.

Major Market Indices

At the close of trading, the Dow industrial average was off 160.07 points, or 1.5 percent, at 10,296.89 — its lowest close since Dec. 19. Since Friday, the Dow index has dropped 2.8 percent and has fallen to a fresh low for all of 2004.

“[Investors] are playing it safe because of the economy,” said Hugh Johnson, chief investment officer at First Albany, noting that there has been a shift of funds from stocks to safe-haven bond investments.

Investors appeared reluctant to make major commitments amid uncertainty over high stock valuations, analysts said. They also said investors were trying to collect profits ahead of a correction — a pullback in stock prices in response to the nearly year-long market rally — but may have helped fuel the correction instead.

“This is the third day in a row of some pretty heavy-duty rotation out of the cyclical stuff into the defensive stuff,” said Scott Wren, equity strategist for A.G. Edwards & Sons. “It’s like a steamroller effect, with a little selling early on, then more and more as anticipation of a correction set in and people decided to lock in some of these profits.”

Broader stock indices also fell sharply Wednesday, with the lion’s share of the losses coming in afternoon trading.

The Nasdaq Composite, full of technology stocks, fell 31.01 points, or 1.6 percent, to 1,964.15, racking up a loss of 4.1 percent for the week thus far. Wednesday’s close was the index’s lowest close since Dec. 22. The Standard & Poor’s 500-stock index lost 16.69 points, or 1.5 percent, and closed at 1,123.89 — its lowest since Jan. 13.

Thursday’s drop of more than 1 percent in all three stock indices showed what a difference a year makes. Stocks began their current rally a year ago this week, after weathering a three-year bear market. And four years ago to the day — on March 10, 2000 — the technology-laden Nasdaq Composite hit an all-time intraday high of 5,132.52 and the index’s lifetime closing high of 5,048.62.

With no additional catalyst in sight after 12 months of solid gains, and with forecasts for first-quarter earnings still ahead, investors may be scaling back their expectations, analysts said.

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“You get to a point where people feel like, ’Well, I’m paying for future earnings,”’ said Barry Berman, head trader for Robert W. Baird & Co. in Milwaukee. “And if you get the sense that you’re not going to get the future earnings, or they’re not going to come as quickly as you’d hoped, then you stop buying ... Why would you pay these prices anymore?”

Before the open, the Commerce Department said America’s trade deficit mushroomed to an all-time high of $43.1 billion in January, as sales of foreign-made goods hovered near record levels. The data show imports continued to drag on economic growth going into the first quarter of the year.

The Dow industrials drew some support from consumer products giant Procter & Gamble.

P&G, the Dow’s most expensive stock, surged $3.04 to $105.53 after it raised its earnings forecast for the quarter and the year. The maker of Pampers diapers, Crest toothpaste and Mr. Clean also approved a 2-for-1 stock split and raised its annual dividend.

P&G’s upbeat announcement kept blue chips from suffering a deeper slide early on in the session, but it wasn’t enough to rally investors.

Meanwhile, Krispy Kreme Inc. fell $4.06, or 11 percent, to $34.10, after reporting earnings that matched expectations. Some on Wall Street expressed concern that the doughnut maker, which opened 35 new stores during the quarter, would not be able to sustain the gains.

On the Nasdaq, Sun Microsystems Inc. gained 2 cents to $4.35, rebounding from steep declines following downgrades from several brokerage firms. Analysts have questioned the long-term outlook for the computer-systems maker’s Unix business.

EchoStar Communications Corp. was down 16 cents at $34.12 after saying it was working to resolve a fee dispute with Viacom Inc. that has darkened several channels for its 9 million satellite TV customers.

DISH Network owner EchoStar yanked CBS programs and Viacom’s cable channels — including MTV, VH1 and Nickelodeon — in more than a dozen cities this week. Viacom was down 98 cents at $38.24.

Overseas, Japan’s Nikkei average finished Wednesday down 0.9 percent. In Europe, France’s CAC-40 added 0.6 percent, Britain’s FTSE 100 gained 0.1 percent and Germany’s DAX lost 1.1 percent.

Reuters and the AP contributed to this report

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