Stock Plunge Slows as Dow Declines 8.38
The stock market’s record-setting fall slowed Thursday, but Wall Street analysts were unwilling to predict a resumption of the vigorous rally of the last four months.
The widely watched Dow Jones industrial average fell 8.38 points Thursday to close at 1,518.23. With Wednesday’s historic 39.10-point drop, the index has fallen more than 47 points from Tuesday’s record high of 1,565.71. Thursday’s volume on the New York Stock Exchange was a very heavy 176.46 million shares, down only slightly from Wednesday’s 180.33 million.
The dizzying rise and fall of the Dow and other market indices left government and private financial analysts groping for explanations. Some cited arcane technical theories for the so-called “correction,” some looked to Federal Reserve Board policies and pronouncements and others pointed to political events, such as the recently announced economic sanctions against Libya.
If there was one point of agreement, it was that the 270-point rise in the Dow industrial average since September had to stop somewhere.
“Both the stock and bond markets had an incredible run-up over the last several months, virtually straight up. And markets don’t go straight up forever,” said Allen Sinai, chief economist at Shearson Lehman Bros., a big Wall Street investment firm.
Views on Future Differ
But where the markets will go next inspires widely disparate views.
Beryl W. Sprinkel, chairman of the President’s Council of Economic Advisers, said that the market’s plunge Wednesday was a one-time aberration and counseled his chief client to remain optimistic.
“Best not to try and predict the future, but you should be willing to take bets from anyone predicting something like the 1929 crash,” Sprinkel advised President Reagan in a memo delivered Thursday morning. “Keep in mind that (Wednesday’s) 39-point drop represented only a 2.5% decline, compared with the 1929 day when ‘Wall Street laid an egg.’ That was a 12.8% drop.”
White House spokesman Larry Speakes said Reagan is “taking bets” that on July 1 stocks will be selling at higher prices than today.
Period of Frantic Activity
The conventional wisdom on Wall Street and in Washington is that the nation’s financial markets will experience a brief period of relatively frantic activity, with wide stock price swings. Eventually, perhaps in a month or six weeks, the markets will settle into a moderate upward trend, according to this view.
“There will be a period of consolidation. The market will be down some, then up some, then things will quiet down,” said Paul Elliot, senior vice president and market analyst at the New York investment house of Cowen & Co. “I think you’ll see moderation after volatility. The pendulum swings both ways, and then it starts slowing up.”
But, as always, there are the unconventional thinkers.
One of them, Robert Drach, president of Drach Market Research in Miami, said he had sold a substantial share of the stocks he manages in early December, as the market was still rising to record heights, and added that he believes the current high prices have no underlying support.
“There’s a big divergence between (corporate) earnings expectations and real earnings. The Standard & Poor’s index is up 30%, but the profits of those companies are down 2%. That’s too scary for us. I’m out of the market and have been for a month.”
It is always tricky to relate swings in the financial markets to external events, but the people who are paid to do so pointed to several pieces of business and political news that might have caused Wall Street’s “sell” light to flash.
Libya Tension Cited
Sinai of Shearson Lehman Bros. identified uncertainty about whether there is resolve in Washington to trim the federal budget deficit, the apparent intent of the Federal Reserve Board to maintain interest rates at current levels and international tension brought on by the White House’s threatening words and actions toward Libya.
“There are no big negatives to indicate a big collapse in either the bond or stock markets, but there are some worries,” Sinai said. “Will the country stay on a deficit reduction track, and what will be the latest round of action concerning Libya and terrorism?
“Though there are risks and problem out there, we haven’t changed our fundamental view, which is upbeat for the economy and financial markets in 1986.”
Another factor cited by Sinai and Sprinkel is the increasing dominance of computerized stock buying and selling programs, which are touched off by disparities in the prices of stocks and stock futures in different markets. Once the differences reach a certain level, institutions managing vast stock portfolios begin to sell (or buy) big blocks of stock, and the momentum builds on itself. Such mass transactions took place in the final hours of trading on Wednesday.
‘Pernicious and Dangerous’
“These programs are a major factor in the speed and amplitude of the rise or decline of the market. They are as pernicious and dangerous as speculation,” said Michael Metz of the Wall Street firm of Oppenheimer & Co.
“A lot of these short-term moves of the market are psychological phenomena. It’s the herd instinct, and you get these stampedes. Nobody wants to fight the trend, and the trend this week is down. Whether the real world has changed is problematical, but the psychology has.”
