Pessimism over the state of the economy and concern over the stock market's record high price levels triggered a wave of selling yesterday that sent the closely watched Dow Jones industrial average plummeting 45.75 points.
It was the biggest one-day point drop in history.
The sudden descent of market prices was caused in large part by an avalanche of computer-directed selling programs. Such sales are part of trading strategies that involve stocks and stock-index futures and are keyed to price differences between the two markets.
A seasoned Wall Street professional estimated that about 30 sell programs, involving 7 million shares of stock worth $346 million, rolled through the New York Stock Exchange throughout the day.
The growing influence of program trading can be seen in these statistics: Of the 10 biggest one-day drops in the history of the DJIA, from 1929 to 1986, five have taken place this year. They ranged from a 33-point drop to yesterday's 45.75-point drop. The programs also have been responsible for major one-day gains.
The swift descent of the DJIA took the average down to 1,840.15, a drop of 2.4 percent from its all-time high on Friday of 1,885.90. Even so, the drop was far behind the loss recorded on Oct. 28, 1929, when the Dow slid 38.33 points to 260.64, a loss of 12.9 percent. To match that loss today, the market would have to fall 243 points.
Declining issues smothered gainers by 5 to 1 on 123 million shares on the New York Stock Exchange. The relatively moderate volume was taken by Wall Streeters to mean the sell-off did not generate panic on the part of large institutional investors.
Sizable drops were seen in broader market indicators. Standard & Poor's 500-stock index fell 5.71 to 239.96, the second-biggest point loss in its history. The American Stock Exchange index fell 4.09 to 276.45, and the National Association of Securities Dealers index of over-the-counter stocks fell 5.52 to 394.73.
The pessimism that sparked the sell-off was centered in the futures pits in Chicago where traders control the prices of futures contracts on stock indexes. The stock indexes are a key part of the computerized strategies used by large institutions to lock in quick multimillion-dollar profits by simultaneously buying millions of shares of stocks and selling futures contracts.
When traders become leery about the outlook for stocks, they lower the prices of the futures contracts, bringing the price traders paid for the stocks in line with the cost of the futures. That allows those holding the stocks to reap their profits before the futures contracts expire if they sell the shares.
The program selling began shortly after the opening bell, taking the market down 16 points in the first 10 minutes of trading.
"The programs were coming in just back to back. They just wouldn't quit," the observer said, adding most of the action came in the American Stock Exchange's major market index. Monte Gordon, research director of Dreyfus Corp., said that traders had been reappraising "a market operating with its feet planted firmly in midair."
Gordon cited several factors as responsible for traders' pessimism, including a sense that the Federal Reserve Board was not going to push for lower interest rates. "There is some feeling that the Fed, while it will not tighten credit , will not be pursuing efforts to bring interest rates down," he said.
He said lagging corporate profits were worrying traders who looked at the long drop in interest rates, at the low inflation rate and at other factors and were wondering why the economy had not picked up.
Larry Wachtel, market analyst for Prudential-Bache, noted that sudden market swings "are no longer unprecedented" because of program trading. "That's the way the market is. It's volatile, it's violent and then followed by moves to all-time highs. What the market is saying is that we're going down before we go up."
In trading, United Press International reported: Pacific Gas & Electric was the most active NYSE-listed issue, losing 1/4 to 22 1/2. Gulf States Utilities followed, down 1 1/2 to 8 1/8, then Allegheny Power, up 5/8 to 41 3/8.
Among blue chips, AT&T dropped 3/4 to 24 1/4, Eastman Kodak fell 2 3/8 to 59 3/4, American Express fell 1 1/2 to 60 3/8, Dow Chemical fell 7/8 to 57, Celanese lost 4 1/8 to 229 1/2, Du Pont dropped 3 3/8 to 83 5/8, General Motors fell 1 3/8 to 76, General Electric dropped 2 5/8 to 79 1/8 and U.S. Steel eased 3/8 to 21 1/8.
IBM plunged 3 1/8 to 146 3/4, Digital Equipment dropped 4 1/4 to 84 1/8 and Texas Instruments fell 6 3/8 to 125.