Dow Drops 120 Points, Worst Single-Day Plunge in 2 Years
Stock prices suffered their sharpest one-day drop in more than two years Friday as the Dow Jones Industrial Average plunged 120.31 points amid mounting pessimism over the future of the U.S. economy.
The closely watched Dow, which had seemed to defy gravity in recent weeks as bad news about the economy proliferated, plummeted through the psychologically important 3,000 barrier to finish the day at 2,943.20, off 3.9%. Other markets also tumbled.
“Either the recovery has stalled out completely, or we’re tilting back into a recession,” said David M. Jones, chief economist at Aubrey G. Lanston & Co., a New York securities firm. Either way, he said, the expected improvement in corporate profits that had been supporting high stock prices won’t materialize.
“Every economic measure--from retail sales to new unemployment claims to consumer confidence--tells us that the economy is not as strong as Washington would have us believe,” said Jack Conlon, director of the equities division of Rothschild Inc.
Adding to the economic malaise was a sharp early selloff in the recently buoyant biotech stocks and a pounding of bank stocks by investors worried about proposals to cap interest rates on credit cards.
As the weakness spread to other stock groups, “everybody headed for the exit at the same time,” said Larry Wachtel, market strategist for Prudential Securities Inc.
Declining issues outnumbered gainers by 5 to 1, and volume was a heavy 236 million shares. The last big drop in the stock market happened on Oct. 13, 1989, when the Dow fell 190.58.
Friday’s selloff was exacerbated by wave after wave of computer-driven sell programs.
Program trading comprises a number of different strategies involving fast-paced trades of large blocks of stock via computers. The complex strategies--employed by many major brokerage houses for their own profit--often amount to trading individual stocks against stock index futures and options contracts, which represent a bet on the broad market’s direction.
When sellers begin dumping stocks in New York and stock-index futures in Chicago, the program-trading strategies can feed off themselves, creating a downward spiral.
The potential for such selling frenzies is the major reason the New York Stock Exchange slapped controls on program trading after the 1987 market crash, when the Dow plunged 508 points in one day. The controls have had mixed results.
The plunge continued Friday despite the triggering of the New York Stock Exchange’s “circuit-breaker” after stocks had fallen 50 points. The circuit-breaker is designed to slow computerized program trading at the minus-50 level on the Dow, but it does not halt such trading completely.
Friday, the cascade of sell orders approached panic levels in the final hour of trading, with the trading of shares of numerous blue-chip companies halted due to order imbalances.
“This is the beginning of a long-awaited correction, and things are going to get more painful before it’s over,” predicted Michael Metz, market analyst for Oppenheimer & Co. “The program trading simply exacerbated the underlying trend, which is down.”
Indeed, some investors drew troubling parallels between Friday’s breathtaking market tumble and that of Friday, Oct. 16, 1987, when the market plunged 108.36 points. The following Monday the Dow suffered its all-time record crash of 508 points.
“It’s a little disconcerting,” Conlon said. “The eerie similarities will make a lot of people nervous over the weekend,” he continued, though he stressed that he was not expecting a Monday crash.
The day began on a negative note as the Federal Reserve Board reported that the nation’s factories, mines and utilities operated at 79.6% capacity in October, the lowest rate since June. In another report, the U.S. Commerce Department said business inventories climbed 0.6% in September.
Compounding the pessimism was a report that the University of Michigan’s index of consumer confidence had plunged in early November, to recession levels of 70.7 from 78.3.
“Consumer confidence is the key to a recovery, and what these numbers are telling us is that the consumer has neither the willingness, not the ability, to lead us into a recovery,” said Conlon.
Many on Wall Street also pointed to Thursday’s approval by the U.S. Senate of a measure that would force banks to roll back interest rates on their credit cards to 14% from the currently prevalent 19% or 20%. “It’s a desperate, misguided attempt to restart the economy,” Metz said.
Added Jones: “It’s almost a perfect example of what politicians should not do to get the economy moving. Bank earnings would be killed . . . and credit rationing would cut off marginal borrowers completely,” further dampening consumer spending.
“I’m calling this the Al D’Amato stock market,” added Jeffrey Applegate, a money manager at Shearson Lehman Advisors, referring to the Republican senator from New York who championed the interest-rate limitations.
The market’s steep selloff was apparent in the declines of Dow-index stocks. Among the major losers, Boeing tumbled $3.75 to $45.125, Eastman Kodak lost $3 to $46.25, pharmaceuticals giant Merck slumped $7.625 to $137 and 3M Co. fell $3.75 to $88.
Other hard-hit sectors:
* Retail issues fell on new worries about weak consumer spending. Wal-Mart dropped $3.25 to $47.375, Home Depot lost $3 to $57.75, Price Co. slid $3.50 to $56.50 and Gap Inc. tumbled $4 to $48.25.
* Banking issues that plunged included Chase Manhattan, down $1 to $16.875; Wells Fargo, off $2.625 to $59.625, and Banc One Corp., down $2.75 to $43.
* Biotech stocks that led smaller issues lower included Amgen, down $5.50 to $52; Immune Response Corp., down $6.25 to $34.75, and Biogen, down $7.875 to $38.625.
