Stocks Plunge Again at End of Wall Street’s Worst Week
Wall Street continued its headlong dive Friday, for the second straight day, as the Dow Jones industrial average lost 34.17 points, ending its worst week ever with the heaviest trading day in New York Stock Exchange history.
Combined with Thursday’s record one-day loss of 86.61 points and smaller losses in the first three days of the week, the widely watched Dow industrial index this week lost 141.03 points, or 7.4%, and closed at 1,758.72. That easily outstripped the previous record loss of 82.5 points in the week ended April 4.
The market’s worst daily percentage loss remains the 12.8% collapse of Oct. 28, 1929.
Trading volume on the New York Stock Exchange reached 240.49 million shares Friday, relegating Thursday’s volume of 237.57 million shares to second place among the exchange’s busiest days.
Floor traders uniformly described Friday’s trading as ferocious, particularly in the morning, when mutual fund customers, shocked by news of Thursday’s loss, redeemed fund shares in vast numbers. That forced the mutual funds to sell stocks in order to raise cash.
Although many investment professionals argue that the market’s decline is a routine “correction” in a bull market that had brought the Dow index to above 1,900 this summer from about 1,300 last September, some believe that price swings like those of this week are unnerving individual investors and driving them out of the market.
“There’s been significant psychological damage in the last two days, particularly to the small investor,” said Ben Niedermeyer, senior vice president of Janus Capital, a Denver-based mutual fund and investment advisory firm. “You’re going to need at least two months of sideways activity before you see another rally.”
Also exerting a heavy influence on the market Friday were large institutions following computer-dictated trading programs and professional money managers selling stocks to lock in profits in advance of their quarterly reports to clients, due after the end of September.
“Some of these portfolio managers are so young they’ve never seen a bear market before,” said Jon Groveman, head trader at the firm of Ladenburg, Thalmann & Co. “They don’t know what to do, so they’re raising cash.”
Market Up and Down
In contrast to Thursday, when prices headed lower almost without pause, Friday’s market moved up and down in waves.
The Dow Jones industrial average headed slightly higher in the first 10 minutes of trading. But the index quickly reversed itself and, after the bond market failed to respond positively to some encouraging economic reports, stock prices reacted as if they had been pushed off a cliff.
“I can’t ever recall seeing it drop as fast as it did this morning, and I’ve been doing this for 20 years,” said Jerry Simmons, a trader for the brokerage firm of Smith Barney & Co. He said traders faced “a total lack of buyers” during the morning.
48-Point Rally
The Dow index plunged by more than 48 points by 10:30 a.m. Eastern time--and then headed back up, pulling almost even with its opening by noon. “That 48-point rally was pretty exciting,” remarked Luis Mendez, co-head of equity sales and trading at the investment firm of First Boston.
The market’s action after lunchtime was all down, however. Stocks in almost all industries were affected, and every major stock index showed significant losses. Among others, the New York Stock Exchange composite index fell 2.44 points to close at 132.5, the American Stock Exchange index fell 3.08 points to close at 257.24, and the over-the-counter composite index fell 6.56 to close at 346.78.
On the New York Stock Exchange, four stocks fell in price for every one that gained. Among the particular sufferers were food, tobacco and drug company stocks, which have experienced the sharpest gains during the bull rally and thus were the best candidates for profit-taking.
With computer trading and panicky mutual-fund investors dominating the trading, the market scarcely paused to consider two bullish economic reports that contradicted the dire expectations that had driven the market lower on Thursday.
Retail Sales Up
The Commerce Department reported that retail sales rose in August by 0.8%, more than in July but well below the 2.5% that had been rumored Thursday. Moreover, the producer price index, an inflation indicator, rose in August by only 0.3%, well below the rumored 0.5%.
The reports were considered bullish because they suggested that the economy is growing moderately, perhaps at a pace that will keep inflation in check and might even lead to lower interest rates. Part of the reason for Thursday’s plunge was concern by investors that the reports would show such a heating of the economy that an interest rate increase could be expected. But, as it turned out, the impact of the reports was barely noticed.
“This financial world is dominated by speculators, arbitragers and traders,” Michael Metz, market strategist for Oppenheimer & Co., complained. “I don’t think there’s a serious investor alive in the world today.” Although stocks are hardly trading at bargain prices, he said, “you can’t tell me the economic outlook has changed enough in two days to justify this kind of move.”
Hedging Technique
Exacerbating Friday’s slide, traders said, was a steady inflow of sell orders traceable to the relatively new practice of “portfolio insurance,” in which large institutional investors such as pension funds sell stock index futures to hedge against major downward moves in stock prices.
These computer-directed insurance maneuvers force down the price of the futures contracts, which in turn invites other traders to buy the contracts and sell shares of the corresponding stocks, a strategy that guarantees them a profit equal to the difference between the futures price and that of the stocks.
In the process of such so-called “program trading,” traders can throw millions of shares of stock up for sale with the flick of a button. When the market is moving lower in any event, the result can be moves of shocking magnitude, in which each step lower in the futures or stock market drags the other down.
‘Feeding on Itself’
“It might very well have been feeding on itself,” said Richard Sandor, senior vice president for financial futures and options at the investment banking firm of Drexel Burnham Lambert Inc., of the parallel fall of the stock index futures and stock markets.
“I think people should get very used to moves like this,” said Mendez of First Boston. “With the influence of the futures market, stocks can move very quickly.”
