That Crazy Stock Market

By George Russell

Hair-raising, unpredictable, frighteningly volatile -- just about every scary term imaginable was being used last week to describe the outlandish behavior of the stock market. Friday was the day to beat all days, the wildest and woolliest in the market's history. First the Dow Jones average of 30 industrial stocks zoomed up 64 points in the space of five hours of trading, to a high of 2210. Then, just as suddenly, the Dow nose-dived, swinging down an amazing 115 points in 71 minutes. At times there literally were no buyers on the trading floor of the New York Stock Exchange, just as earlier in the day there were sometimes no sellers. Said Michael Antolini, a trader with Cantor Fitzgerald Securities: "Everyone went nuts. It was sheer insanity."

By the time the trading frenzy was over, the Dow had dropped 44.15 points, & closing at 2101.52, still up 24.88 points for the week. It was only the second time since the new year began that the index had fallen by the end of a day's trading. In the process, the highly computerized N.Y.S.E. smashed yet another record by trading a phenomenal 302 million shares, bettering the mark of 253 million shares set on Jan. 15. Complicating things even further for record keepers, Friday's spectacular Dow reversal came only 24 hours after the index had registered its biggest single-day rise ever, 51.60 points.

To many analysts, it seemed that the previously irrepressible stock market was finally beginning to reflect the same economic uncertainty that last week kept the U.S. dollar bobbing against the Japanese yen and the West German mark. The latest official statistics presented at best a mixed picture of the health of American business. They put inflation last year at 1.1%, the lowest rate in a quarter-century, but also revealed that the economy was growing at a much slower rate -- 1.7% in the fourth quarter of 1986 -- than the Reagan Administration had expected.

The statistical trends hardly explained Wall Street's loony rise and fall. The main cause of the fierce roller-coaster ride was the volume of buy and sell orders triggered by computer-driven trading programs at major investment houses. When market prices reach prescribed levels, the so-called program traders can blitz the market in seconds with orders representing many thousands of shares of a broad spectrum of stocks. On Friday morning those orders seemed merely to be building on the previous day's historic 51-point climb. The driving force behind that record-breaking market rush, says Richard McCabe, a vice president of the Merrill Lynch investment firm, was "big institutional investors. They do not want to miss another advance."

Acrophobia set in at about 1:45 p.m., when sell orders began flitting through the exchange's super-DOT computer circuits in bunches of 1,000 to 2,000 shares each. Among the hardest-hit blue-chip stocks were 3M, which fell 7 1/4, to 126 3/4; Du Pont, which dropped 4, to 95; and Philip Morris, down 1 1/2, to 81. Some traders attributed the rout to the news of a statement by Federal Reserve Chairman Paul Volcker that a legislative stalemate on banking deregulation could endanger the U.S. banking system.

On international currency markets, the action was only a shade less hectic. For the first time ever, the U.S. dollar slid below the landmark price of 150 ( yen to the dollar in Tokyo before rebounding to 153.25 yen at week's end, marginally higher than a week earlier. In Bonn, the dollar hit a 6 1/2-year low of 1.81 deutsche marks before microscopically edging back to close at 1.815, a 1.8% decline from the previous week.

West Germany's central bank responded to the turbulence with a cut in the discount rate, from 3.5% to 3%. The largely symbolic gesture was intended to mollify U.S. Treasury Secretary James Baker and other American officials who have called for West Germany to expand its economy as a way to sop up more U.S. imports and, along with them, some of the red ink in the $170 billion U.S. foreign trade deficit. Japan was said to be ready to make a similar move, but before that, Japanese Finance Minister Kiichi Miyazawa suddenly flew to Washington for a private 2 1/2-hour chat with Baker. The only visible result of their efforts was a four-paragraph communique that affirmed the two countries' "willingness to cooperate on exchange-rate issues." Translation: the U.S. would not explicitly commit itself to propping up the drooping dollar. One reason: the currency's decline makes imports more expensive and thus can help reduce the trade deficit.

The tide of imports has badly hurt domestic production. Along with its fourth-quarter figure, the Commerce Department announced last week that growth in the gross national product was a sluggish 2.5% in 1986, the lowest rate since the 1981-82 recession. The slump in the dollar's value, though, could prove to be less than a cure for that malaise. As the dollar falls and import prices rise, U.S. inflation could be rekindled. That in turn could lead to an increase in U.S. interest rates, which would hardly stimulate the economy and might blight the stock market's further advance. As if to underline that possibility, Volcker warned that it was "not sensible" to expect the dollar's plunge alone to cure the U.S. trade problem. After weeks of Wall Street euphoria in which the dollar's fall hardly seemed to matter, it appeared that even the stock-market bulls might be getting a case of the jitters.

With reporting by Jay Branegan/Washington and Frederick Ungeheuer/New York