Dow Plunges 39 for Steepest 1-Day Drop in Market’s History
The Dow Jones industrial average suffered its biggest one-day decline ever today as the stock market tumbled from the record highs it reached on Tuesday.
The Dow Jones average of 30 industrials plunged 39.10 points to 1,526.61, exceeding the previous record decline of 38.33 points on Oct. 28, 1929.
Today’s drop amounted to 2.5%, while the single-day loss in 1929 was nearly 13%.
In percentage terms, however, the average’s slide came nowhere near the proportions of the drop in 1929 that began at much lower levels and came to be known as the Great Crash.
Declines outnumbered advances by about five to two on the New York Stock Exchange.
Volume Soars
Big Board volume totaled 180.33 million shares, against 152.95 million in the previous session.
The NYSE’s composite index tumbled 2.94 to 120.20.
At the American Stock Exchange, the market-value index was down 2.63 at 247.26.
The index was off 15 points going into the final hour of trading. Traders and analystsattributed the sharp final-hour drop to large scale selling of futures-related programs that began feeding on itself as future contracts began selling at a discount to cash indexes in Chicago.
Analysts said the selloff was prompted in part by a sudden rise in interest rates in the credit markets. Prices of long-term government bonds, which move in the opposite direction from interest rates, fell about $20 for every $1,000 in face value.
Other analysts said some of the selling cameafter the Federal Reserve Board overrodeAdministration objections and voted three to two to implement a new interpretation of its rules limiting the use of high-interest “junk bonds” in hostile corporate takeovers. (See Junk Bonds story, Page 2.)
Investors appeared to sell stocks of likely takeover targets, anticipating that a limit on junk bond financing will curtail many corporate mergers.
The upsurge in interest rates was attributed to signs of economic strength that showed up in today’s government report on the employment situation, and to disappointment that the Federal Reserve has not lowered its discount rate.
Once bond and stock prices began to slide, brokers said, it touched off a rush of selling by investors seeking to cash in, and thereby protect, their gains arising from the powerful rally staged by both markets in late 1985.
Brokers didn’t claim to be pleased by the stock market’s nosedive, but they said the general mood was by no means panicky. They argued that the market was due for something like this after its heady rise last year.
“It’s painful while it’s happening, but long-term it’s healthy,” said William LeFevre at Purcell, Graham & Co.
In early trading, government and corporate bond prices receded slightly, giving back some gains from Tuesday’s unexpected rally. Interest rates edged up a bit.
Heavu Borrowing Needs
Traders again turned their attention to the government’s heavy borrowing needs.
In the last of three auctions slated this week which together total $26.05 billion in securities, the Treasury today was selling $4.75 billion of new bonds that are to mature in 20 years and one month.
The credit markets also had some new economic information to digest. The Labor Department said civilian unemployment declined to 6.9% last month from 7% in November.
Maria Ramirez, an analyst with Drexel Burnham Lambert Inc., said the job report suggested the economy is growing at a moderate pace which might keep the Federal Reserve Board from relaxing its credit policies further.
“These job numbers do not create any kind of concern at the Fed that the economy is pulling back from its recent growth rate and perhaps implies the economy does not require any additional stimulus by the Fed,” Ramirez said.
The Tuesday strength in the bond market was linked to a combination of things, including optimism that weak energy prices will help keep inflation under control.
Some analysts have also been hoping that sluggish economic activity will induce the Fed to become more generous with credit.
In the secondary market for Treasury securities, prices of short-term governments fell 5/32 point from late Tuesday, intermediate maturities dropped 7/32 point and long-term issues were off between 13/32 point and 15/32 point, according to the investment firm of Salomon Bros.
The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.
The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, edged up 0.12 from late Tuesday to 111.61. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, was down 1.25 at 1,168.30.
In corporate trading, industrials dipped 1/2 point in light trading and utilities were off point in moderate dealings.
Among tax-exempt municipal bonds, revenue bonds were unchanged in active trading and general obligations were unchanged in moderate activity.
