Triple Witching Hour, Signs of Inflation Send Dow Plummeting 48.57
Stocks took their worst pasting in 11 months Friday as a government report showing accelerating inflation dashed investors’ hopes that interest rates would rise no higher.
The Dow Jones industrial index plunged 48.57 points to close at 2,292.14 following news that the producer price index jumped 1% in February, for the second month in a row. Worsening the blow was the quarterly close-out of stock-related options and futures contracts--called “triple witching hour”--and a jarring announcement from International Business Machines Corp. that its profits would not meet expectations.
“There’d been a lot of optimism all week,” said Hugh Johnson, market strategist with First Albany Corp. in New York. “It got beaten to a pulp today.”
Trading volume on the New York Stock Exchange came to 242.90 million shares, the highest since last January. More than 103 million shares traded hands in the session’s first hour, making it the fifth busiest opening hour in the Big Board’s history.
The Dow was off as much as 65 points after IBM’s mid-afternoon announcement but regained some lost ground in the final minutes of trading. While the indicator still eked out a 10-point gain for the week, the day’s loss was the worst since April 14, 1988, when the Dow fell 101.46 points.
Optimism in Market
At the opening of Friday’s session, the Dow was only 7 points shy of its post-crash high of 2,347.14, set last Feb. 7. Many investors expected to see the Dow set a new post-crash record.
The market has remained strong in the face of rising interest in the past five months, seemingly confident that the Fed would not allow rates to rise too high. The market had seen additional cause for optimism this week as government reports on retail sales, factory production and housing starts suggested that the economy was weakening enough to prevent any further rise in rates.
But the inflation report popped the balloon. It showed that inflation “is a lot more deeply embedded than people thought, in a broad range of consumer products and capital goods,” said Johnson of First Albany.
Many analysts expect the Federal Reserve to try to counter inflation by lifting a key interest rate, the federal funds rate, to 10% from the current 9.75%. While the hike would come to only a quarter point, “it would take it across an important psychological barrier,” Johnson said.
Many market analysts remained optimistic about stocks, but others voiced negative sentiments. Johnson, for example, predicted that the Dow will fall to 2,100 soon, followed by “a pretty trendless year, when only the very good investors will be able to make money.”
Many economists had been predicting a 0.4% rise in the producer price index rather than a full 1% figure. “I was on TV before the announcement predicting a 0.4% rise, and you can bet this made me look like hell,” said William LeFevre, market analyst with Advest Inc.
The close-out of stock-related futures and options contracts is traditionally a volatile day, when prices can swing 5% or 10%. Many big institutional investors stay out of the market on such days--a fact that can worsen falls on days such as Friday by eliminating potential buyers from the market.
Rule Slowed Drop
Still, some investors believe the the pressure from futures-related selling might have been worse except for a rule instituted at the Chicago Mercantile Exchange last summer. The rule, activated for the first time since its inception, kept the Standard & Poor’s 500-stock index future from dropping more than 5 points in the opening 10 minutes of trading.
The morning announcement of the higher producer price index set off a wave of futures selling that would have been far worse in the absence of the rule, some traders said.
“The inflation news, the tripling witching hour and the IBM announcement compressed a fall that might have taken days into just a few hours,” said Michael Metz, analyst with Oppenheimer & Co. in New York.
London Market Down
On the New York Stock Exchange, 1,445 issues fell while only 225 advanced and 305 were unchanged. In addition to the Dow’s 2.1% fall, the Standard & Poor’s 500-stock index fell 6.75 points to 292.69, as the New York Stock Exchange composite index fell 3.45 to 164.65.
In the over-the-counter market, the NASDAQ composite index lost 7.32 to 402.19. The American Stock Exchange’s market-value index lost 4.16 to 328.36.
On the American Stock Exchange, Texas Air fell 1/8 to 12 1/2. Leaders of the striking unions at Texas Air’s Eastern Airlines unit asked Congress to amend the federal bankruptcy laws to allow creditors access to Texas Air’s assets.
On the Tokyo Stock Exchange, the Nikkei index lost 77.23 points to close at 32,021.01. In London, share prices plunged in the worst single-day loss this year, with the Financial Times 100-share index down 39.5 points at 2,073.1.
