Stock prices here and around the world plummeted Monday in a selloff 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 in history, falling 554.26 points to 7,161.15 on record trading volume of 685.52 million shares. That eclipsed the previous mark, the 508-point loss of the Oct. 19, 1987, crash. But because the Dow index itself is much higher today, Monday’s 7.2 percent collapse was scarcely one-third as severe in percentage terms and only the 12th-worst decline in history.
Nevertheless the plunge was steep enough to rattle investors and traders and to prompt 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 selloff in the United States, were sharply down again today. In Hong Kong, the Hang Seng index tumbled 13.7 percent, or 1,438.31 points, to close at 9,059.89 points. In Tokyo, the Nikkei Stock Average lost 725.67 points, or 4.26 percent, to close the day at 16,312.69.
Treasury Secretary Robert Rubin made an unusual personal appearance on the steps of the Treasury Building in Washington, shortly after the U.S. markets’ close Monday, to express his faith in the continuing strength of the 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 overpriced and also will 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 company 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 lost money - was mirrored on other U.S. indexes.
The Standard & Poor’s 500, considered a better proxy for the broad stock market, lost 64.65 points, its biggest point loss ever and, at 6.87 percent, its 16th-largest drop. The Nasdaq Composite Index, a measure of small and medium stocks with heavy representation of high-tech companies, lost 115.83 points, more than twice the previous record point loss, and, at 7.02 percent, its fourth biggest loss in percentage terms.
Testing ‘the new paradigm’
Only the bond market rallied, with the 30-year U.S. Treasury Bond gaining 1-7/8 points to yield 6.12 percent, the lowest level since February 1996.
Monday’s drop, following earlier losses, cut the Dow industrials’ gain to 11.06 percent for the year, after the index peaked on Aug. 6 with a 28 percent gain.
But many market observers said the severity of the selloff might 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 multimonth bear market like those of 1987 and 1990, or a vertiginous short-term drop like that of the 1987 crash, when the Dow lost nearly 23 percent of its value in a single day. Thus their likely behavior in the teeth of a market reversal is impossible to gauge.
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.
Greenspan to weigh in
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 selloff 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. There a rippling sequence of 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 after trading opened Tuesday, with the Hang Seng Stock Index losing 5.8 percent.
The continuing aftershocks of the Asian crisis spread to Europe, where markets closed down 2.5 percent to 4.7 percent, and Latin America, where bourses closed with losses of more than 10 percent.
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 of two so-called circuit breakers, mandating a market-wide 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 breath, 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 due to 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 imposed in 1990 originally called for a 30-minute halt after a 250-point drop on the Dow and an hourlong halt after a 400-point loss.
Where would we be?
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 for sure whether they stem 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 the University of Southern California 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.”