Fear and panic of historic proportions overwhelmed the stock market Monday, forcing the Dow Jones industrial average to a stunning decline of 508 points, by far the biggest one-day plunge in history.
The Dow Jones average lost almost a quarter of its value, nearly doubling the percentage drop that occurred on Oct. 28, 1929, the crash that preceded the Great Depression. With Monday’s fall, the Dow has lost half the ground it had gained since the bull market got under way on Aug. 12, 1982, when the Dow stood at a mere 776.92.
The collapse came on dizzying trading volume of 604.4 million shares on the New York Stock Exchange, nearly double the previous record of 338.5 million shares, set last Friday.
The unprecedented dive in the Dow, to a close of 1,738.74, immediately raised fears of an international economic crisis and a recession in the United States. Mutual funds, pension funds, foundations, endowment funds, retirement accounts, stock brokerage firms, individual investors and others together lost hundreds of billions of dollars, and the impact could reverberate throughout the U.S. economy.
Monday’s debacle alone wiped out $503 billion in the market value of all stocks. A total of about $1 trillion in stock market wealth has been erased since the market peaked on Aug. 25, as measured by Wilshire Associates of Los Angeles.
Japanese and other foreign investors, who helped drive the bull market’s rapid rise of the last five years, unloaded stocks en masse, triggering worries that they might pull money out of other U.S. investments also.
Government Action Urged
The collapse spurred calls among Wall Street and congressional officials for dramatic government action, ranging from pumping more money into battered financial markets to regulation of certain market practices that may have aggravated Monday’s free fall.
In addition, Wall Street experts expressed fears of severe financial squeezes, if not outright bankruptcies, among Wall Street firms and others that had bet on higher stock prices or had borrowed heavily to finance stock purchases.
The sharp declines may be far from over. In an ominous sign that the Dow could undergo another sharp tumble today, prices of Japanese stocks plummeted by record amounts in early trading this morning amid sell orders so overwhelming that more than 95% of Tokyo Stock Exchange stocks could not open for trading in the first few hours.
Nose dives in Asian and London markets usually trigger similar declines in the American market, as they did Monday. Any sharp decline in Japanese shares could force investors there to pull money out of U.S. stocks in order to cover their losses, further depressing the U.S. market.
“It was a financial meltdown as good as any that has come along,” said John Phelan, chairman of the New York Stock Exchange, in describing Monday’s rout as the financial equivalent of the Chernobyl nuclear disaster in the Soviet Union last year.
“What we have is an economic crisis of international proportions,” said John D. Connolly, chairman of the investment policy committee of the brokerage of Dean Witter Reynolds in New York. He and other financial experts said the U.S. Federal Reserve Board and foreign monetary authorities must move quickly to pump money into financial markets to drive down interest rates and shore up weakened financial institutions.
Monday’s collapse shattered the previous record one-day point drop in the Dow average of 108.35, set on Friday. Monday’s drop equaled a decline of 22.61%, exceeding the percentage declines of 12.8% on Oct. 28, 1929, and 11.7% the next day. The record percentage decline occurred on Dec. 12, 1914, when the Dow lost 24.4% of its value.
Since Aug. 25, when the Dow average hit a record 2,722.42, the index has declined 983.68 points, or 36.13%. The Dow now stands at its lowest point since April 7, 1986.
Massive Trading Volume
Stocks plunged in markets worldwide Monday as fear of higher interest rates and higher inflation, increased Middle East tensions, lack of confidence in the Reagan Administration’s economic policies and other woes gripped individual and institutional investors. Prices of commodities plunged as well.
The crash led many experts to declare the 5-year-old bull market dead and buried. More important, some economists and others said that the crash, just like its counterpart in 1929, could spark enough of a decline in consumer and business confidence and spending to trigger an economic slowdown, if not an outright recession.
“The market is saying we will have a recession next year,” said Allen Sinai, chief economist with Shearson Lehman Bros., noting that recessions are almost always preceded by bear markets.
Individual investors were left stunned. “I’m a dead bull,” said one investor at the downtown Los Angeles brokerage office of Charles Schwab & Co. The investor said he had lost all his savings but refused to give his name.
Democratic congressional leaders blamed the market crash on Reagan Administration policies that they charge are encouraging high interest rates and large budget deficits. They called for reducing the deficit and raising taxes.
Reagan Administration officials--who in turn have accused Democrats of stalling action on the high budget and trade deficits--tried to reassure investors on Monday but offered little in the way of concrete proposals.
“I think everyone is a little puzzled,” President Reagan told reporters when asked to explain the plunge. “I don’t know what meaning it might have because all the business indices are up. There is nothing wrong with the economy.”
The Securities and Exchange Commission said it was “monitoring the situation very closely” and was in close contact with other regulatory bodies.
Besides rising interest rates, fears of higher inflation and other woes, Monday’s carnage was blamed on concern about the U.S. dollar’s falling further in the wake of Treasury Secretary James A. Baker III’s remarks Sunday that the dollar may have to fall relative to the West German mark. A falling dollar could lead to further rises in interest rates and inflation. Baker tried to reassure markets on Monday, saying after a meeting with West German officials that the major Western economic allies would work to keep the dollar at current levels. But his remarks seemed to have little effect in calming Asian markets early today.
Also contributing to the rout were escalating international tensions resulting from a U.S. retaliatory attack against an Iranian oil platform on the Persian Gulf. That set off a sharp rise Monday in prices of gold and silver, traditionally seen as financial havens in times of world crises.
Monday’s market panic started in Tokyo and London but spread to every type of American investor.
Large institutional investors such as pension funds and securities houses bailed out of the market, some through computerized trading strategies known as “program trading,” in which hundreds of millions of dollars of stocks can be sold or bought at the touch of a button.
Small investors also panicked, selling individual stocks or shares of stock mutual funds. So heavy were withdrawals from mutual funds that Fidelity Investments, the nation’s largest mutual fund company, said it would need as long as seven days to return investors’ cash or transfer their money into other mutual funds. Normally that process only takes one day.
In addition, brokers were selling stocks from so-called “margin” accounts when investors who had bought the stocks with borrowed money refused to put up additional collateral.
Bond Yields Rising
Investors were selling stocks in order to buy bonds, as bond yields have risen sharply in recent weeks. The increased demand for the bonds drove bond prices up and yields down.
But the biggest reason for Monday’s free fall, traders said, was simply a wave of panic rivaling, if not surpassing, the panic of 1929.
So heavy was the imbalance of orders to sell over orders to buy at the opening of the New York Stock Exchange on Monday that about 700 of the 1,600 stocks traded on the Big Board did not open for trading in the first hour, NYSE Chairman Phelan said.
“You can’t even trade because you have no idea where prices are at any time,” Courtney D. Smith, a vice president for futures trading at the New York office of Banque Paribas, said about half way through Monday’s trading stampede.
The Pacific Stock Exchange, with trading floors in Los Angeles and San Francisco, closed a half hour early because of the order overflow.
However, Phelan said the markets and brokerage firms functioned very well in handling the slide in prices and unprecedented volume. He said he knew of no major investment firm that was in serious trouble as a result of the drop. The market will open today at its normal time, he added.
Declining issues swamped advances by nearly 50 to 1 on the New York Stock Exchange. Losers among the big-name stocks included Digital Equipment, down $42.25 to close at $130; Eastman Kodak, down $27.25 to finish at $62.875, and AT&T;, down $6.375 at $23.625.
Other indexes also fell dramatically. The American Stock Exchange’s market value index plummeted 41.05 points to close at 282.50. The NASDAQ composite index for over-the-counter stocks fell 46.12 points to finish at 360.21.
Some analysts said it could take weeks, if not months, before investors regain their confidence in the market.
Others, however, said a turnaround could be just around the corner, and that many bargains can be found.
Staff writers Keith Bradsher in Los Angeles and Michael A. Hiltzik and Robert E. Dallos in New York contributed to this story.