WALL STREET: THE WILD DAY AFTER : Dow Gains 102 Points as Interest Rates Drop : Most Stocks Fall; Volume at New High
Buoyed by lower interest rates and a pledge that the Federal Reserve would help ease the crisis gripping world financial markets, the Dow Jones average of industrial stocks staged a volatile rally Tuesday on record trading volume, regaining 102.27 of the 508 points it lost Monday. It was the biggest one-day point gain ever.
However, many other stocks not included in the Dow average suffered further drubbing, with investors still shaken by Monday’s unprecedented and panicky collapse. The selling pressure indicated that many investors fear the economy may be headed for a recession and that, for stock prices, the worst may not be over. Losing stocks outnumbered gainers by a ratio of more than 5 to 2 on the New York Stock Exchange.
Meanwhile, fallout from Monday’s stock market “meltdown” grew, as two small stock trading firms crippled by the crash shut down or were taken over. Individual investors, stunned by Monday’s collapse, continued to withdraw money from stock mutual funds or sold stocks to pay off loans taken out to buy shares at much higher prices. And calls grew in Congress for tougher scrutiny of computerized trading activities, which contributed to Monday’s rout.
In wild trading, the Dow average of 30 blue chip stocks surpassed its previous one-day record gain of 75.23 points, set on Sept. 22. Tuesday’s gain, to a close at 1,841.01, helped the widely watched Dow average recover about a fifth of its loss from Monday’s collapse and about one-ninth of its 938-point decline since its peak on Aug. 25. In percentage terms, however, the Dow’s gain totaled only 5.9%, the indicator’s 30th-largest advance in history by that measure.
608 Million Shares
Volume on the Big Board totaled an estimated 608.12 million shares, just ahead of the previous record of 604.33 million set Monday.
On the overall market, however, the bears still trampled the bulls. Declining stocks totaled 1,399, compared to 537 gainers, on the New York Stock Exchange. Stocks traded on the American Stock Exchange and over-the-counter markets took a beating, as two key indexes measuring the performance of those shares each declined nearly 10%.
Many of the stocks that declined were in manufacturing or transportation industries, which typically do poorly during a recession, and those that gained were in such industries as utilities that generally do well during an economic slowdown.
“The market is betting on economic weakness,” said Hugh A. Johnson, chief investment officer at the investment firm of First Albany Corp.
“We’re still not out of the woods,” said Charles I. Clough, chief investment strategist for Merrill Lynch. “Monday’s crash destabilized a lot of previously complacent investors.”
The market showed signs that the volatility characterizing Monday’s session will continue for some time. In the first hour of trading, the Dow average zoomed to a gain of just over 200 points, only to decline to a 26-point loss before rallying again. Such a wild one-day swing would have been considered a record for volatility before Monday’s unprecedented 508-point free fall.
Tape Hours Late
The market continued to show signs of strain. Trading in many blue chip issues on the New York Stock Exchange was halted for extended periods at various times during the day due to imbalances of buy and sell orders. At the close of trading, the NYSE tape displaying the most recent trades was running 190 minutes late.
The NYSE asked its member firms on Tuesday to refrain during part of the day from so-called program trading, the type of computerized trading strategies that were responsible in part for Monday’s tumble.
The Pacific Stock Exchange, with trading floors in Los Angeles and San Francisco, closed 30 minutes early Tuesday because of an order overflow, repeating the early closing of Monday.
Members of Congress stepped up their calls for government action to ease market volatility and restore investor confidence. Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance, called for the Securities and Exchange Commission and the Commodity Futures Trading Commission to consider curbs on stock-index futures trading and to study a ban on or suspension of program trading.
Bond Yields Fall
Tuesday’s activity showed that investors were moving toward what they perceived as safer, more conservative investments, analysts said. Demand for Treasury securities and other bonds rose sharply, boosting their prices. Interest rates on those issues accordingly fell sharply, with yields on short-term Treasury bills tumbling nearly a full percentage point.
“This flight to quality is symptomatic of a high level of fear,” analyst Johnson said.
The rise in the Dow average occurred after stocks declined sharply in trading on overseas markets. Stocks on the London Stock Exchange ended sharply lower after the most volatile and heavily traded day in the exchange’s history. Tokyo stocks suffered a record plunge on Tuesday, but in early trading today they recovered some of their losses as Japanese investors were encouraged by Tuesday’s partial rally in the U.S. market.
The American market defied the foreign markets on Tuesday, heartened in part by a statement issued early Tuesday by the Federal Reserve Board that it would pump new money into the financial markets to head off any crisis, despite its concerns that such actions may lead to higher inflation.
That statement was viewed by some analysts as a significant change in Fed policy, which until recently had been seen as trying to tighten monetary conditions.
Investors were also encouraged by announcements Tuesday that two major New York banks that raised their prime lending rates to 9.75% from 9.25% last week had cut them back to 9.25%.
Stock prices were also buoyed by investors looking for bargains. Among those bargain hunters were several corporations, including USX, Merrill Lynch, General Motors, Ford Motor and Chrysler, which announced programs to buy back their own stock or said they will accelerate previously announced buy-back programs.
Aided by news of those buy-backs, General Motors stock rose $9.75 Tuesday to finish at $59.75. USX jumped $3.50 to end at $25. Among other blue-chip issues, General Electric rose $3.50 to end at $45.375. International Business Machines rose $11.75 to close at $115.
Even with those positive developments, the dominant pressure in the market was from sellers, not buyers, Merrill Lynch’s Clough said. Some of that selling pressure came from mutual funds that had to liquidate stocks to raise cash for investor withdrawals. The Wall Street investment house of Goldman Sachs allocated $1 billion of its capital to buy stocks from mutual funds, some of which might have had trouble raising cash to cover customer withdrawals.
Selling occurred also when investors holding stock financed with borrowed money refused to put up additional collateral to cover the loans, liquidating their stocks instead.
“Speculators were wiped out or damaged so severely that they’ll have trouble coming back,” said Dick Ryan, a broker at the Beverly Hills office of Dean Witter Reynolds.
The smaller stocks traded at the American Stock Exchange and in the over-the-counter market were particularly hard hit. The Amex market value index fell 24.34 points to close at 258.16, a decline of 8.6% on top of a 12.7% drop Monday. The NASDAQ composite index for the over-the-counter market lost 32.46 points to finish at 327.75, a drop of 9% on top of a 11.4% drubbing on Monday.
Tuesday’s record rally in the Dow seemed to fit a historical pattern, as many other past sharp market blow-offs have been followed by sharp rebounds. Indeed, on Oct. 30, 1929, the Dow recorded its third highest percentage gain ever of 12.34%, following declines the two previous days of 12.8% and 11.7%.
However, many of these rally attempts have not been sustained, so the market may be due for still more declines, said Stan Weinstein, editor of the Professional Tape Reader, a Hollywood, Fla., newsletter.
