Evoking chilling memories of the stock market crash almost exactly two years ago, the Dow Jones industrial average plunged 190.58 points on Friday amid fear of an end to the takeover fever that had driven stock prices to record heights.
The drop was the largest since the 508-point crash on Oct. 19, 1987. Market analysts predicted a further fall, but few committed themselves to predicting a full-fledged crash when trading resumes Monday.
The wave of panic selling at the end of the trading day was triggered by disclosure that the investor group seeking to buy UAL Corp., United Airlines' parent company, had failed to get financing for the $6.75-billion buyout. That capped weeks of bad news from companies attempting to arrange junk bond and other financing for takeovers or restructuring. It fueled fears that many possible takeovers that speculators were betting on may not take place. The drop, on Friday the 13th, erased $189.5 billion from the value of investors' stock holdings.
Eugene Peroni, an analyst at the securities firm Janney Montgomery Scott in Philadelphia, said: "There is a fear that some of the bigger deals can't get financed, and that sent a ripple effect across a broad range of key stocks, many of which had risen sharply on takeover or restructuring speculation."
Peroni described the trading late Friday as "total emotional and psychological chaos."
Most of the slide in stock prices came in the last hour of trading. The free-fall, which sent the Dow Jones industrial average tumbling to 2,569.26, was ended only by the closing bell.
Traders said initial panic selling touched off heavy computerized program trading. Program trading, in which market conditions may trigger computerized selling of huge volumes of stock, was one factor implicated in the 1987 crash.
Market analysts noted frightening parallels between what happened Friday and the events that began on a Friday two years ago. A drop of 108.35 points on Friday, Oct. 16, 1987, presaged the crash that came the following Monday. This time, analysts said there is some risk that investors' fear may coalesce over the weekend, and that investors in Japan, most of whom were asleep when the New York markets began to slide, will be big sellers on Monday.
But traders and analysts said there were major differences both in the stock market and the overall economy between today and 1987, including fewer signs that stocks are overvalued. While another big plunge is certainly possible, the market could also rebound on Monday, they said.
The stock market fall and its related effect on stock futures trading prompted the Chicago Mercantile Exchange to use its new emergency "circuit breakers" procedures. Trading in the Standard & Poor's 500-stock index futures was halted twice by the exchange.
Invoking a new emergency procedure designed to control program trading, the New York Stock Exchange also halted trading in the stock of Walt Disney Co. Shares of six other companies traded on the Big Board were halted under normal exchange procedures because of large imbalances between buy and sell orders late in the day.
President Bush declined to comment on the market's fall. But Treasury Secretary Nicholas F. Brady said it should be viewed in the context of the Dow Jones average's 591-point rise since the beginning of the year. Brady said in a statement that "today's stock market decline doesn't signal any fundamental change in the condition of the economy. The economy remains well balanced, and the outlook is for continued moderate growth."
The market had reached a record high of 2,791.41 on Monday.
On Broad Street in Manhattan, just outside the New York Stock Exchange, an electrician who had been working on the exchange floor Friday installing cables said there had been a sudden frenzy of activity on the floor in mid-afternoon. "People were going crazy, running back and forth, trying to call people, and people weren't picking up the phone," he said. "They were cursing and yelling at each other."
The investment community had been heartened following the 1987 crash because no recession materialized and the market not only rebounded but, beyond all expectations, soared to new heights less than two years later. But the surprising setback on Friday, following a week in which stock prices had slowly drifted lower, discouraged many of the floor traders and specialists who emerged from the Big Board's trading floor at the end of the day on Friday.
Many seemed dazed and shaken, angrily brushing past the crush of reporters and spectators who had gathered outside the exchange. "I don't want to talk about it," said one man. Another, asked for his reactions to the day's activities, managed to jest: "I'm going into the restaurant business."
But an executive on the trading floor of one of the largest Wall Street firms said traders and brokers so far seem to be taking the bad news in stride. "People weren't as stunned this time," he said. "'87 was an anchor for this experience."
Richard A. Grasso, president of the NYSE, said that the exchange's new emergency procedures are in place and that he expects a continued smooth functioning of the exchange regardless of the volume of shares traded Monday. The new procedures also include a series of temporary halts of all trading on the exchange beginning if the market drops 250 points in one day.
In the last two years, Grasso said, "We've done a lot of work getting the system ready to handle whatever may happen." He said other improvements include better communications with other exchanges. Grasso said the New York exchange had made "a sweep" by phone of brokerage firms and found no signs of liquidity problems that caused a crisis at many securities firms in 1987.
Friday's fall in the Dow index was the second-largest ever in terms of points, but only the 12th largest in percentage declines. The drop represented a 6.9% fall for the Dow, compared to the 22.6% plunge on Oct. 19, 1987. Friday's volume was 251.17 million shares, up considerably from 160.12 million the preceding day. The fall in the Dow index was matched by drops in broader measures of stock market activity. The NYSE composite index closed at 185.56, down 11.42. On the Big Board, 1,597 stocks declined, only 141 issues rose, and 234 were unchanged. Stocks on the American Stock Exchange and those traded over the counter also sharply declined.
The stock market drop also touched off a "flight to quality" as investors frantically sought the haven of more secure investments. Prices of U.S. Treasury bonds surged. Prices of some bonds ended as much as 2 points higher than on Thursday.
Meanwhile, the junk bond market, in a severe decline for weeks, sagged again.
Federal regulators for the most part adopted a wait-and-see attitude. A spokesman for the Federal Reserve in Washington said: "We have nothing to say." This contrasts with the Fed's actions immediately after the 1987 crash, when the nation's central bank publicly promised to assure liquidity in the financial system.
A spokeswoman for the Securities and Exchange Commission said the agency "is monitoring the situation" but would have no immediate comment.
Paradoxically, according to Suresh Birud, chief investment strategist at Oppenheimer & Co. in New York, part of the reason for the market's pessimism had to do with recent signs that the U.S. economy may be stronger than expected. Retail sales figures were surprisingly strong, and some indicators showed the possibility of renewed inflation. "It gave the message that the Federal Reserve is not likely to ease interest rates soon."
Experts said several factors distinguish the current situation from two years ago. In terms of measures such as the ratio of stock prices to companies' earnings, stocks aren't nearly as overvalued as they were in 1987. And Amar Bhide, a professor at Harvard Business School who is a speculator in both the stock and futures markets, said the level of computer-driven "portfolio insurance" has declined substantially since immediately before the 1987 crash. Portfolio insurance, which triggers automatic selling when stocks drop a certain amount, also received a big part of the blame for the crash two years ago.
Times staff writer David Treadwell and columnist Michael Schrage in New York contributed to to this story.
THE DOW'S BIGGEST LOSSES The Dow Jones industrial average's percentage fall Friday was the 12th worst since the average was increased to 30 stocks on Oct. 1, 1928. Here are the 15 worst days for the average, including the point change. Oct. 19, 1987: 508 points: 22.6% Oct. 28, 1929: 38.33: 12.8% Oct. 29, 1929: 30.57: 11.7% Nov. 6, 1929: 25.55: 9.9% Aug. 12, 1932: 5.79: 8.4% Oct. 26, 1987: 156.83: 8% July 21, 1933: 7.55: 7.84% Oct. 18, 1937: 10.57: 7.75% Oct. 5, 1932: 5.09: 7.15% Sept. 24, 1931: 8.20: 7.07% July 20, 1933: 7.32: 7.07% Oct. 13, 1989: 190.58: 6.91% Jan. 8, 1987: 140.58: 6.85% Nov. 11, 1929: 16.14: 6.82% May 14, 1940: 9.36: 6.8% (Orange County Edition) BIGGEST COUNTY STOCKMARKET LOSERS
The 10 publicly traded companies in Orange County whose stock prices posted the biggest losses in Friday's market plunge.
Stock Close Company Exchange Friday % Change 1.Commtron Corp. AMEX $ 8.875 -11.25 2.MAI Basic Four NYSE $ 4.50 -10.0 3.Western Digital AMEX $ 7.00 - 9.7 4.Gradco Systems OTC $16.875 - 9.4 5.Fluor Corp. NYSE $32.25 - 8.5 6.Alpha Microsystems OTC $ 5.75 - 8.0 7.Pacific Scientific NYSE $14.875 - 7.0 8.Standard Pacific NYSE $18.00 - 5.9 9.Carl Karcher Ent. OTC $13.75 - 5.2 10.Nichols Institute AMEX $21.125 - 5.1