Stocks Finish Up 9 After Falling 167 in Wild Trading Day

By TOM PETRUNO

July 17, 1996 12 AM PT

TIMES STAFF WRITER

Stock prices plummeted but then climbed back on Tuesday in a wild session that set trading volume records and left even Wall Street veterans stunned. The Dow Jones industrial average fell as much as 167 points by midday, before rocketing in the afternoon to close at 5,358.76, up 9.25 points for the day.

The market’s spectacular turnaround raised hopes that share prices may be stabilizing--at least temporarily--after the steep slide in recent weeks triggered by higher interest rates and worries about future corporate earnings growth.

As Tuesday’s early dive threatened an even worse decline than Monday’s 161-point Dow loss, “we went into the [panic] stage, and then people came to their senses and realized they had overdone it,” said Richard Eakle, market analyst at Eakle Associates in New York.

Upbeat second-quarter earnings reports from some large U.S. companies, including Johnson & Johnson, Eastman Kodak and Caterpillar Inc., helped buoy investors’ mood, analysts said.

Also, bond yields fell after the government reported that consumer price inflation was negligible in June.

Even so, the broader market did not recover as well as the Dow industrial stocks. Most stock indexes still closed off for the day, although far above their lows.

And many major mutual fund companies reported being swamped by calls from anxious individual investors, whose record investment in the funds over the past few years has helped fuel Wall Street’s now 5 1/2-year-old bull market.

Most fund companies said they were suffering redemptions from stock funds, but that the selling was mild overall, and that most investors were merely calling to check on their funds or ask what was behind the market’s recent swings.

Indeed, the extreme volatility has been unsettling even to many longtime market analysts.

“This is intimidating even to the professionals,” said Hugh Johnson, analyst at the brokerage First Albany Corp. in New York. “I can only imagine what individual investors are thinking.”

He also warned that investors were likely to remain nervous in the near-term and that a further sell-off couldn’t be ruled out.

As with Monday’s Dow plunge, analysts said Tuesday’s slide, and then recovery, had no specific catalysts but rather built on their own momentum once underway.

After a tumble overnight in many foreign markets--Japan’s key stock index sank 1.6%, while Germany’s dove 3.2%--the U.S. market rallied in the opening minutes, before quickly going into another tailspin.

With the Dow index at Monday’s close already down 7.4% from its 1996 peak, many investors by Tuesday morning apparently decided to sell some of their shares rather than risk being caught by a much more horrendous decline.

The Dow fell as much as 167 points, or 3.1%, from Monday’s closing value, by about 1 p.m. EDT.

Other stock indexes also went into free-falls. The Nasdaq composite index of mostly smaller stocks fell as much as 51 points, or 4.9%, after tumbling nearly 4% on Monday.

Meanwhile, the value of stock index “futures” contracts--a synthetic way to bet on, or against, the market--also was plunging. Their value fell low enough by midday to trigger trading halts in those contracts.

The futures halts derailed some of the fast-paced computerized trading that short-term institutional traders engage in. That seemed to trigger bargain-hunting in individual stocks by some big investors, analysts said.

“Some people like to wait until the market gets to its most dangerous point, and then buy,” said Thomas McManus, strategist at the brokerage firm of Morgan Stanley & Co. in New York.

When the buying began, it focused on the big stocks in the Dow index. The market didn’t head straight up, but rather followed a roller-coaster pattern for the rest of the afternoon, though at higher levels. At one point the Dow was up more than 50 points on the day, before falling back near the close.

In fact, the New York Stock Exchange said the Dow’s point swings, from low to high, during the day were the second widest in history, after only the October 1987 market crash. In percentage terms, however, the swings were far less significant.

By the end of trading, NYSE volume had reached a record 683 million shares, topping the previous record of 652 million set on Dec. 15 of last year.

Nasdaq trading volume also was a record, at 896 million shares, beating the 807-million-share day of May 7.

Traders said the volume was handled without major problems by the NYSE and Nasdaq computers.

“It was record volume, and it was chaotic but orderly,” said Len Hefter, trader at brokerage Jefferies & Co. in Dallas.

However, analysts said it was unclear how many of the shares traded went into the hands of investors, as opposed to the hands of dealers and NYSE floor “specialists” whose job it is to be the buyers of last resort in a sinking market.

In any case, the magnitude of selling raised hopes that the market was experiencing a “blow-off” of fear, allowing investors who had been sitting worried on the sidelines to finally exit, perhaps giving way to a more stable market in the near term.

Analyst Eakle noted that many of the big stocks that had held up well over the past week were hammered early Tuesday. That is a classic sign of investor “capitulation,” he said, as investors are frightened out of the stocks they ordinarily would never sell.

“When I see the strongest stocks come under attack, I think it’s signaling more of an end to this than a beginning,” he said.

Many analysts still argue that the market’s surprise tumble in recent weeks is a normal pullback after a tremendous surge in stocks in 1995 and into May of this year, adding to hefty gains since October 1990, when this bull market began.

Typical “corrections,” or sell-offs, in bull markets have historically shaved 5% to 15% from indexes like the Dow, before prices stabilize.

At its low point Tuesday, the Dow was off almost exactly 10% from its 1996 peak of 5,778.00, reached on May 22.

Arnold Kaufman, editor of Standard & Poor’s Outlook investment newsletter in New York, argues that despite higher interest rates and some weaker-than-expected corporate earnings reports, “the background conditions are still pretty good for stocks.” He noted that inflation remains low, the global economy continues to grow and baby-boomer investors still need to invest for their retirement 10 or more years away.

Favorable earnings reports on Tuesday from a host of companies reminded investors that despite worries about upward pressure on corporate costs--including rising wages--many businesses remain highly profitable, which is key to attracting investors to stocks.

“I think it’s still a solid picture for stocks,” said Jim Walline, money manager with the Lutheran Brotherhood mutual funds in Minneapolis. The surprise of the next year or so, he argued, may be that the U.S. economy can remain strong without pushing interest rates markedly higher.

Investors may hear more on that topic on Thursday, when Federal Reserve Board Chairman Alan Greenspan testifies before Congress. Fears of a Fed rate increase--to slow the economy--have helped spark stocks’ recent pullback.

Meanwhile, the lingering worry is that many more investors--especially individuals in mutual funds--are itching to take away some of their profits after the long stock market uptrend.

Mutual fund companies, including Vanguard Group, Fidelity Investments and Stein Roe & Farnham, said Tuesday that investors are redeeming shares, but they all called the activity modest.

Charles Schwab & Co., the discount brokerage, said investors who own funds through Schwab redeemed $129 million in stock fund shares on Monday. That is out of $70 billion total in fund assets at the company, a spokesman said.

Still, some analysts fear that many investors have been badly scarred by the market’s abrupt pullback, and will choose to liquidate more of their holdings in coming weeks.

“I really think the psychology of the market has the potential to be changed here,” because of the swiftness of the recent sell-off, said Doug Fabian, head of Fabian Investment Resources in Huntington Beach.

* ROLLER COASTER: Comparing this slide to others; brokers’ reaction. D1, D3

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A Case of the Jitters

The bellwether Dow Jones average of 30 major stocks plunged then recovered Tuesday in reaction to continued evidence of a strong U.S. economy. Such growth typically fuels fear of inflation, but for average Americans, the news is generally good.

A quarter-hourly reading of the Dow (Dow on the Quarter Hour)

9:30 a.m. (Open): 5,349.51

12:30 p.m.: 5,265.17

4 p.m. (Close): 5,358.76 [+9.25]

****

WALL STREET IS WORRIED . . .

* Interest rates: The Federal Reserve Board is expected to raise short-term rates by a half percentage point in August, to dampen economic growth and inflationary pressures.

* Corporate profits: Although many big companies continue to report healthy earnings, there have been some major disappointments lately, and some experts fear that profits will soon be squeezed by greater competition.

. . . BUT THERE IS GOOD NEWS IN THE ECONOMY

* Job growth: Unemployment is shrinking in many parts of the country, and wages are rising.

* Technology’s role: U.S. companies are now among the most productive in the world, thanks largely to the growing role of computers.

* Global markets: The world economy is growing, and markets for U.S. goods are burgeoning in Asia, Latin America and elsewhere.

* Shrinking deficit: The U.S. budget deficit this year is expected to be the lowest in 15 years.

Researched by JENNIFER OLDHAM / Los Angeles Times

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NYSE Volume

The 10 busiest days on the New York Stock Exchange, as measured by trading volume, including after-hours trades; in millions of shares:

Tuesday

12-15-95

10-20-87