Dow Dives 554; Trading Halted

By MICHAEL A. HILTZIK and THOMAS S. MULLIGAN

Oct. 28, 1997 12 AM PT

TIMES STAFF WRITERS

NEW YORK —

Stock prices here and around the world plummeted Monday in a decline so unrelenting it triggered two extraordinary trading halts on the New York Stock Exchange, including one that led to an early close of the trading day.

The widely watched Dow Jones industrial average suffered its worst point drop, falling 554.26 points to 7,161.15 on record NYSE trading volume of 685 million shares. That eclipsed what had been the biggest point loss, the 508-point plunge of the Oct. 19, 1987, crash.

But because the Dow index itself is much higher today, Monday’s 7.2% loss was scarcely one-third as severe in percentage terms and only the 12th-worst decline in history.

Nevertheless, the drop was the worst percentage-wise since 1987, and was steep enough to rattle investors and traders across the country, prompting widespread speculation over whether the market’s seven-year bull run, which has driven stock prices to unprecedented heights, is ending.

Asian markets, whose plunge helped trigger Monday’s sell-off in the U.S., opened sharply down again today. Hong Kong’s Hang Seng stock index was off 15.5% midway through the trading day, while Tokyo’s Nikkei index was off about 4.5%. Benchmark indexes in New Zealand, Australia, the Philippines, Malaysia, Singapore, Thailand and Korea also fell sharply. The declines triggered new fears of more selling in the U.S. markets this morning.

Treasury Secretary Robert E. Rubin made an unusual personal appearance on the steps of the Treasury Building in Washington, D.C., shortly after the markets’ close, to express his faith in the continuing strength of the U.S. economy. He reminded investors that the nation’s economic “fundamentals”--strong corporate profits, low inflation, high consumer confidence, and rising worker productivity--are still in place.

Yet, the market’s performance is sure to raise questions about whether stocks have been dangerously overpriced and will also inspire new debate about the wisdom and operation of the New York Stock Exchange’s “circuit breakers,” which are designed to keep panics from building during powerful market moves. The Big Board’s two most stringent circuit breakers were both triggered Monday for the first time in their seven-year history.

“Confidence is shaken,” said Michael Metz, a longtime bear, who is chief portfolio strategist for the investment firm Oppenheimer & Co. “I really think we have seen the highs for the next year or so.”

Monday’s collapse in the Dow, every one of whose 30 stocks fell in price, was mirrored on other U.S. share indexes.

The Standard & Poor’s 500, considered a better proxy for the broad stock market, lost 64.65 points, its biggest point loss, and 6.9%, its 16th-largest percentage drop. The Nasdaq composite index, a measure of small and medium stocks with heavy representation of high-tech companies, lost a record 115.83 points and, at 7%, suffered its fourth-biggest loss in percentage terms.

Only the bond market rallied, as some investors sought “safe haven” in fixed-income securities. The 30-year U.S. Treasury bond yield slid from 6.27% Friday to 6.12%, the lowest since February 1996.

Monday’s drop in stocks, coming atop recent losses, cut the Dow industrials’ gain to 11.1% for the year, after the index peaked Aug. 6 with a 28% gain.

Many analysts blamed big institutional investors for Monday’s sell-off, rather than individuals. Indeed, Vanguard Group, the nation’s second-largest stock mutual fund firm, said its incoming phone volume was 20% above expectations, but that on balance fund investors were buyers, not sellers.

“We saw no sense of concern [from callers] like 10 years ago” when stocks crashed, said Vanguard spokesman Brian Mattes in Valley Forge, Pa.

But Fidelity Investments, the largest fund company, said its clients were net sellers of foreign stock funds and many non-diversified U.S. stock funds.

In any case, many market observers said the severity of the plunge might soon test conventional wisdom that economic conditions are so uniquely hearty and American stockholders are so well focused on long-term investing that a sustained bear market is almost impossible--a doctrine known as “the new paradigm.”

Some experts noted that most of today’s individual investors have not experienced either a several-month bear market like that of 1990, or a vertiginous short-term drop like that of the 1987 crash, when the Dow lost nearly 23% of its value in a day. Thus, their likely behavior in the face of a market reversal is impossible to gauge.

“We haven’t tested the willingness of people to leave their money in the market,” said Larry Tint, managing director of Barclays Global Investors, a money management firm. “Today, they are being tested.”

That’s true even if Monday’s drop proves to be the result of Wall Street overreaction rather than changing economic realities.

“There’s no immediate fundamental threat in terms of the economy or interest rates,” observed Elliott Shurgin, a vice president at Standard & Poor’s. “It’s a visceral reaction, fear and an emotional response. But it’s scary as hell to watch.”

Moreover, more unnerving news may emerge today with the release of the federal government’s third-quarter employment cost index, a gauge of U.S. workers’ wages and salaries that is viewed as a harbinger of inflation.

On Wednesday, Federal Reserve Chairman Alan Greenspan is scheduled to address the Joint Economic Committee of Congress in a speech that is sure to be widely watched.

Several times this year, Greenspan has warned in congressional testimony and Wall Street speeches of “asset inflation,” especially the frenetic run-up of stock prices across the board. He has hinted that he might be inclined to raise short-term interest rates to burst any speculative bubble.

Many economists now believe that the market’s fall has ruled out any hike in short-term rates, possibly through the end of this year--in part because the sell-off itself has wrung much speculative excess out of the market. But they will be looking to Greenspan for judicious words aimed at calming jittery traders.

“Greenspan has got to be at his central bankerly best . . . “ said Robert Brusca, chief economist for Nikko Securities in New York “He’s got to try to not answer direct questions (from Congress) about would you, could you, can you raise interest rates.”

The immediate trigger of Monday’s fall--and the weak U.S. trading that persisted through most of last week--was instability in overseas markets, especially Asia. A rippling sequence of Asian currency devaluations has raised doubts about the region’s ability to sustain the high growth that means profits for U.S. multinational companies.

Late last week, the ripples reached Hong Kong, which had been viewed as a bastion of stability because its dollar was pegged at a fixed rate to the U.S. dollar. Hong Kong stocks last Friday recovered from a steep fall the day before, but resumed their slide on Monday.

The continuing aftershocks of the Asian crisis spread to Europe, where markets closed down 2.5% to 4.7%, and Latin America, where bourses closed with losses of more than 10%.

When New York trading opened Monday morning, the trend was relentlessly down. At 2:35 p.m. EST, the Dow’s loss of 350 points triggered the first circuit breaker, mandating a marketwide half-hour trading halt. Markets in Toronto and Mexico also halted trading.

Although the rule, instituted after the 1987 crash, was designed to allow investors and traders to catch their breaths, selling only accelerated when the market reopened at 3:05 p.m. Exactly 25 minutes later, the Dow’s loss of 550 points triggered the second and last circuit breaker, a one-hour trading halt. Because the Big Board’s trading day normally ends at 4 p.m., the second halt effectively closed the market for the day.

Trading on the Big Board has occasionally been halted because of political or physical events, including early closures caused by severe weather, and after the shootings of Presidents Kennedy and Reagan. But Monday represented the first halts in exchange history because of market conditions, according to officials at the NYSE.

The trading-halt rule originally called for a 30-minute suspension after a 250-point drop on the Dow and an hourlong halt when losses hit 400 points.

The circuit breakers were loosened in February to the current 350- and 550-point thresholds. But they remain controversial because it is impossible to know whether they stem from irrational selling or exacerbate it. Selling volume, however, almost doubled in the 25 minutes between the two trading halts, relative to that experienced earlier in the day.

“We don’t know where the market would have closed had there not been circuit breakers,” said Lawrence Harris, a professor of finance at USC who recently completed a study of trading restrictions. “It will be almost impossible to draw a reliable conclusion because the question is what would have happened without them.”

Still, sentiment Monday on the NYSE trading floor seemed to favor the halt.

“Seems to me it did what it was supposed to do,” said James Jacobson, a specialist trader on the NYSE. “It’s not designed to stop trading, but give people a chance to take a breather.”

Traders said later that one striking difference between Monday’s fall and the 1987 crash was the smooth functioning of the NYSE’s computerized systems this time around.

The system worked exceptionally well,” said Robert Fagenson, another Big Board specialist, after the close. “There was no delay in reporting trades in contrast to ‘87,” when stock market systems ran as much as an hour behind the actual trades. “The only thing missing was buyers.”

Mulligan reported from New York and Hiltzik from Los Angeles. Times staff writer James Peltz contributed to this story.

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Week in Review

The index has slid almost 900 points since last week’s closing high Tuesday of 8,060.44.

Daily close, Dow Jones index of 30 industrial stocks

Monday: 7,161.15

Source: Bloomberg

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Dow’s Biggest Drops

Monday’s record 554-point drop didn’t make the Top 10 in percentage terms.

1. Oct. 19, 1987: 508.00 points (22.61%)

2. Oct. 28, 1929: 38.33 points (12.82%)