Waves of nervous sellers, apparently convinced stock prices had peaked, swept through Wall Street yesterday, taking their profits and driving the market sharply lower.
Traders and market analysts agreed that the selloff was triggered by a three-day drop in the value of the dollar against the Japanese yen and the West German mark and a corresponding decline in the bond market.
The closely watched Dow Jones average of 30 blue chip stocks dropped 45.91 points to close at 2654.66. At one stage, the Dow average was down 65 points. The plunge came only a day after the Dow reached an all-time high of 2700.57.
Feverish selling sent stock prices down quickly during the morning session, with the Dow hitting its low shortly after noon. Prices recovered during the afternoon as bargain hunters moved in, but they were no match for the sellers.
"It was a profit-taking spree," said market analyst Eugene Peroni Jr. of Janney Montgomery Scott in Philadelphia. "I would expect it to continue for the next few days. It'll be a tug-of-war between the profit takers and the bargain hunters."
The downturn, Peroni noted, had been widely anticipated by investors nervous about the height of the market and the speed at which it had climbed. The Dow hit 2500 July 17 and 2600 on Aug. 10.
The Dow's fall was its sharpest drop since May 15, when it fell 52.97 points.
While the blue-chip stocks, which have been market favorites, were hardest hit, sell orders swept many stocks lower. Decliners led gainers by 7 to 2 on the New York Stock Exchange, where 198.4 million shares changed hands. The volume was considered heavy but far from a record.
The broad market indexes also fell sharply. The New York Stock Exchange index fell 2.64 to 184.12 and Standard & Poor's 500-stock index slid 4.86 to 329.25. The Amex market value index dropped 4.89 to 357.98.
Program trading, which normally helps drive a falling market lower and a rising market higher, appeared to play only a modest role in yesterday's price movements. Program trading is a computerized strategy used by cash-rich institutions to take advantage of discrepancies between the prices of stocks and futures contracts on stock indexes.
Ludwig A. D'Angelo, an options and futures trader at Oppenheimer & Co. in New York, said the prices of futures contracts on key stock indexes did not permit the wholesale selling of stocks that has accompanied previous down days in the market. However, some institutions had sufficient profits in their trading programs, he said, to "unwind" by selling stocks and buying futures.
The battering suffered by stocks across the board was mirrored in the bond market, where prices dropped 1 1/2 points, or $15 for every $1,000 of face value. Yields, which move in the opposite direction of prices, rose to 8.94 percent from 8.79 percent on the bellwether 30-year Treasury bond.
On foreign exchange markets, the dollar fell to 146.20 yen from 149.20 Monday, and to 1.8440 marks from 1.8732.
The drop in the dollar began Friday when it was reported that the U.S. trade deficit unexpectedly widened to $15.71 billion from the $14.04 billion in May.
"The trade deficit was embarrassingly large, even after a substantial drop in the dollar," said Scott E. Pardee, a vice president of Yamaichi International (America) in New York.
Frank Mita, a senior vice president and head of foreign exchange for American Security Bank in Washington, said he watched the selloff in the dollar after the trade deficit news and was not surprised by the reaction. "Nobody wants to hold dollars when we have that big a deficit," he said.
Pardee said he saw no sign yesterday that Japanese investors were selling stocks or bonds heavily. The selling appeared to be coming mainly from domestic sources, he said.
Some of the selling in the bond market, Pardee said, was coming from dealers who were cutting back sharply on inventories. The dealers were fearful, he said, of the effects of a stronger economy leading to inflation and higher interest rates, which depress bond prices.
Another reason for the fall of the dollar, Pardee suggested, was related to the drop in oil prices. Oil has fallen below $20 a barrel for the first time in two months.
As long as the price of oil was rising, Pardee said, oil merchants were stockpiling oil to avoid higher prices. In many cases, they were selling foreign currencies to buy dollars to pay for the oil. When oil prices dropped, the buying slowed and so did the wave of dollar purchases.
On the trading floor, AT&T was the most active NYSE-listed issue, falling 5/8 to 34 1/8. General Electric followed, falling 1 5/8 to 63 1/2. IBM was third, dropping 1 5/8 to 172 7/8.
Among other blue-chips, American Express fell 1 3/4 to 38; General Motors skidded 1 3/4 to 92 1/8; Ford Motor fell 2 3/8 to 109; USX fell 7/8 to 37 1/8; Merck dropped 3 3/4 to 204; McDonald's eased 1/8 to 60 3/4; Eastman Kodak fell 5/8 to 99 3/8; Procter & Gamble lost 2 1/4 to 99 3/4, and Westinghouse fell 1 1/4 to 69 3/4