The Bull Takes a Nose Dive

By George Russell

In another era, the selling wave would have signaled a stock-market catastrophe. But, surprisingly, there was nothing akin to a major panic on the floor of the New York Stock Exchange last week, even as the four-year-old bull market took a sudden nose dive and the Dow Jones average of 30 industrial stocks suffered its largest single-day decline in history. Only six days after breaking through the 1900 level for the first time ever, the Dow plunged 61.87 points, to 1839, on the week's opening day. On Tuesday the bears were again on the prowl, as the Dow dropped an additional 18.27 points, to 1820.73. For the next two days, the market rallied faintly, then drifted down again to close at 1821.43. Nonetheless, insisted Mason Sexton, president of Harmonic Research, a Wall Street forecasting firm, "the bull market is intact."

Some of the credit for braking the dramatic slump probably goes to the Federal Reserve Board. On Thursday, it announced a cut in the discount rate that it charges on loans to member banks, from 6.5% to 6%. Several major U.S. banks then lowered the prime rate that they charge preferred corporate customers, from 8.5% to 8%. The Fed's action was the third such cut this year, evidently designed to pump more oomph back into the sagging U.S. economy. Word that the rate cut was coming may have curbed investor nervousness. On the other hand, if the announcement was supposed to lead investors thundering back into the market, it failed to do so.

The reasons behind the bull market's sudden fall, according to professional investors, were relatively mundane. As the Dow broke 1900, explained one Wall Street forecaster, "a lot of buyers were taking to the sidelines, trying to figure out whether the assault on 1900 was for real. On Monday, everybody jumped in to cash in their profits." Another reason for the big drop was the fact that early last week stock index futures were selling at a significant discount to current stock prices. For Wall Street institutions using computer-trading programs to conduct business, that meant an opportunity to make a fast profit by simply buying the futures and selling the current stocks.

What was more striking about last week's dive was the extent to which investors now live routinely with the roller-coaster dips of the longest bull market since the 1920s. Stock-market analysts were quick to point out that the early-week drop was equivalent to only 4.2% of the Dow's value, in contrast to the record loss of nearly 13% on Oct. 28, 1929. Moreover, last Monday was the fifth notably dismal day of the year, even as the Dow has climbed about 350 points since Jan. 1. The others: Jan. 8, a 39-point loss; March 21, 36 points; April 30, 42 points; June 9, 46 points. Says Hildegard Zagorski, a market analyst with Prudential-Bache Securities: "The market has handed investors such profits that they can afford to sit philosophically through these emotional down days."

One reason for that relative lack of concern is that the new stock index futures markets, which may have helped trigger last week's selling, give institutional investors the opportunity to hedge against sudden losses. Said Arthur Randall, a broker with the E.F. Hutton investment house: "It takes much more than 80 points and two days to convince them that the party is over."

With reporting by Raji Samghabadi/New York