Rate Cuts Fail to Calm Fears as Dow Falls 72.44--9th Worst Day
Nervous investors, focusing on negative economic news instead of long-awaited cuts in overseas interest rates, on Thursday sent the Dow Jones industrial average reeling to its lowest level since the Oct. 19 crash, renewing fears of further sharp declines.
The 72.44-point plunge, to a close of 1,776.53, represented a drop of 3.92% and was the ninth-biggest single-day point loss ever. The decline was suffered broadly, with about five stocks falling for each that rose on the New York Stock Exchange. Volume was moderately heavy at 204.16 million shares, up from 148.89 million Wednesday.
The nose dive had many analysts and traders bracing for the possibility of the Dow approaching the 1,738.74 level set at the close of Black Monday’s 508-point free fall. Such a “test” of that Oct. 19 floor has been awaited for weeks as an indicator of the market’s underlying strength.
If the Dow can hold firm around that level, it would boost investor confidence and set the stage for a new rally, analysts say. But if the Dow breaks significantly below that support level, confidence would be so eroded that another panic selling wave could ensue.
Rate Cuts Ignored
“You’re in a major bear market here,” said Richard Russell, editor and publisher of Dow Theory Letters, a La Jolla newsletter. If the Dow sinks below the Oct. 19 level, which could happen today, “you would get another nasty decline.”
Thursday’s slide came despite a move by West Germany’s central bank to cut its important discount rate by half a percentage point. That was accompanied by reductions in key rates by central banks in Britain, France, Switzerland, Belgium and the Netherlands.
The moves were designed to spur investment and spending while also increasing demand for U.S. exports, thereby fueling demand for dollars and helping to offset the staggering U.S. trade deficit.
“The fact that the market did not respond is in itself very bearish,” said George Dorian, technical analyst with Wedbush Securities in Los Angeles.
However, analysts said, the European interest rate cuts were to some degree already expected by the stock market. Instead, investors focused on negatives, such as disappointment over Japan’s failure to go along with the cuts, said Hugh Johnson, chief investment officer for First Albany Co.
Investors were also unimpressed by the dollar’s performance in foreign exchange markets, where it strengthened only moderately on the interest rate news. The dollar’s less than impressive gains suggested that further declines in the greenback may be ahead, which in turn could lead to higher interest rates, higher inflation and a weaker economy, Johnson said.
“The outlook for the economy in 1988 has darkened,” Johnson said.
Also depressing stocks were disappointing retailers’ sales reports for November, showing flat to slightly better results despite heavy discounts and promotions. That raised further fears about an recession in the aftermath of the stock crash.
Retailing stocks accordingly were among the worst hit in Thursday’s trading, with Sears Roebuck, K mart and J. C. Penney all recording declines.
Program Trading Blamed
More selling pressure was blamed on statements Thursday by widely followed market guru Robert R. Prechter, editor of the Elliott Wave Theorist newsletter in Gainesville, Ga. He reportedly said the Dow would fall to the mid-1,600 level by the middle of this month.
Computerized program trading was blamed for a late selloff, as the Dow recorded its biggest losses in the final few minutes of the session.
One key to the market’s performance today will be the government’s release of employment data for November, First Albany’s Johnson said. The markets are expecting a rise in non-farm payroll employment of about 125,000 to 150,000, he said. But if the number is disappointing, further selling could follow, he said.
Analysts differed on whether the Dow could mount a rally if the Oct. 19 closing level is reached. Wedbush’s Dorian said reaching that level would bring in a wave of buyers, pushing stocks higher.
Others, however, were not so optimistic. Newsletter editor Russell noted that even though the Dow is still 38 points above its Black Monday low, the average stock is actually below its Oct. 19 low. That, he said, sets the stage for further selling pressure as investors who came in to buy after Oct. 19--in hopes of quick profits--find themselves facing losses instead.
