Dow Plunges 140 in 3rd Worst Loss; Monday Sell-Off Feared : 6.85% Decline Sparks Worry of Recession

Sharply higher interest rates, computerized selling programs and a storm of other worries threw the stock market into a tailspin Friday as the Dow Jones industrial average fell 140.58 points in its third-largest single-day point drop ever.

The 6.85% decline, to a close of 1,911.31, sparked fears of another Black Monday-style drop next week and demonstrated that investors have still not fully recovered from the trauma of last October’s collapse.

Friday’s mini-meltdown also renewed fears of a recession and more cutbacks at already embattled Wall Street brokerage firms.

The day’s events raised new calls for reforms of computerized program trading and other investment strategies that, some contend, have added to the market’s volatility. Computerized selling programs--widely blamed for contributing to the October crash--were largely responsible for a sharp fall of about 70 points in the Dow average in the last hour or so of trading, many analysts said.

‘Blow to Confidence’

“This is a real blow to confidence,� Michael Metz, market strategist at Oppenheimer & Co., said of Friday’s sell-off. “The recuperative process for the market now will be more restrictive.�

“We don’t expect (another Black Monday), but we are prepared,� said Hugo W. Quackenbush, senior vice president for marketing at Charles Schwab & Co., the nation’s largest discount brokerage. He said the firm was doubling its normal weekend staff to handle any surge of investor orders while also reviewing the status of its customers using borrowed funds to buy stock.

Friday’s 140.58-point drop completely wiped out the Dow average’s gains for the previous four sessions, leaving that widely watched indicator down 27.52 points for the first week of 1988.

The unexpected decline has been exceeded in enormity only by the 508-point free-fall on Black Monday, Oct. 19, 1987, and a 156.83-point nose-dive the following Monday, Oct. 26.

Other market indexes also slipped sharply on Friday, while declining issues outnumbered advancers by about 7 to 1 on the New York Stock Exchange.

Volume on the Big Board totaled 197.30 million shares, far lower than the 250-million-plus days usually seen in sessions of such high volatility. Many traders, hampered by the snowy weather in New York, sold stocks in the morning and left early for the weekend, accounting for the relatively low activity.

Friday’s sell-off was attributed to a combination of renewed worries, including higher inflation, higher interest rates, higher trade and budget deficits and a weaker dollar.

Stocks declined right from the opening bell, as traders reacted negatively to a Labor Department report, released early in the day, that civilian unemployment dropped to 5.8% in December, its lowest rate since July, 1979. While the report showed the economy to be in stronger shape than expected, it sparked fears among traders that wage rates may rise, which in turn would lead to higher inflation. That could prompt the Federal Reserve to boost interest rates to keep inflation from overheating.

“Maybe that means we will get a recession earlier than we expected,� said A. Marshall Acuff Jr., portfolio strategist at Smith Barney, Harris Upham & Co. He said many investors have bought stocks in recent weeks thinking that the economy would be weak early in the year and that would drive interest rates down--which would be good for stocks and bonds. “This (unemployment report) has got to come as a jolt to those people,� who probably unloaded stocks on Friday, Acuff said.

Sell-Off in Bond Market

The unemployment news triggered a sell-off in the bond market, which pushed up interest rates and further depressed stocks. Yields on the bellwether 30-year Treasury bond rose to 9.18% Friday from 8.95% on Thursday.

The markets also were hurt by concern that figures for the U.S. trade deficit in November, due to be released next week, will show the deficit widening, possibly to as much as $20 billion from $17.6 billion in October. That sparked fears of a renewed slide in the dollar against foreign currencies.

Pessimism was aggravated by declines in high-technology stocks, whose fortunes are closely tied to the fate of the economy and thus are closely watched as a sign of investor enthusiasm. A report by Tandem Computers that its fiscal first-quarter sales would be lower than expected triggered a sell-off in many technology issues amid fear that Tandem’s poor showing would be repeated throughout that volatile sector.

Tandem stock tumbled $6.75 a share Friday to close at $20.375, a whopping decline of 25%. Other computer issues that lost ground included International Business Machines, which dropped $8.50 to close at $114.875; Digital Equipment, off $11.25 at $130.50, and Unisys, down $3.50 to $32.

Further selling pressure came from investors simply wishing to cash in profits from the past few weeks, analysts said. Since Dec. 4, when the Dow industrials stood at 1,766.74, the average had risen 16.1%.

Seen as ‘a Big Rally’

“That’s a big rally in four to five weeks, particularly during a bear market,� said Peter G. Eliades, publisher and editor of Stockmarket Cycles, a Los Angeles newsletter. Historically, after a major panic like October’s, stocks decline to even lower levels a few months later, Eliades said.

The final and most telling blow came in the last hour or so, when stock-index futures began trading below the price of the underlying stocks in the indexes, causing sophisticated computerized traders to sell stocks en masse and buy the futures to profit from the price discrepancies. This program trading--which had helped the market rise dramatically earlier in the week--accounted for as much as 100 points of Friday’s decline, said analyst Metz at Oppenheimer & Co.

“There were nothing but sellers� when program trading moved into full gear, he said.

The flurry of program trading caught many other investors off guard since they had left work early. “The natural buyers in the East were fighting the snow, while a lot of people on the West Coast were out to lunch,� said Schwab’s Quackenbush.

Analysts also noted that big-block traders, brokerage houses and other dealers--who normally buy stock for their own inventories to help moderate the selling pressure--have slowed their buying and selling considerably since the October crash, afraid to commit their capital to the uncertain market. That has contributed to the market’s higher volatility on relatively low volume, analysts said.

Little Panic Noted

However, because of its suddenness, Friday’s drop appeared to spark little immediate panic among small investors, many of whom were scared away by last fall’s debacle.

“This is a trader’s market,� said Richard Bock, a broker at Bear, Stearns & Co. in Los Angeles. He said he and his clients--mostly speculators--were selling earlier in the week and were not exposed to Friday’s fall. “We can make money in this market.�

Friday’s free-fall ironically came the same day as the release of a report by a presidential commission headed by Nicholas F. Brady, calling for a number of reforms in the wake of the October crash. The panel, however, did not specifically advocate rules that would require program traders to make larger down payments on futures contracts, which would make program trading less profitable.

“Today’s decline will buttress the view of the Brady report� for more regulation of financial markets, analyst Metz said. “This proves you do have to regulate the use of derivative instruments,� such as computerized program trading.

Many analysts expressed fears of another sell-off Monday, but none thought there would be a one-day panic of the enormity of the 508-point debacle on Oct. 19. That plunge was sparked in part by a 108.35-point drop--the first ever above 100 points--the preceding Friday.

Not as Wildly Overvalued

This time, however, stock prices are not as wildly overvalued as they were in early October, analysts said. And many of the more skittish investors already have reduced their exposure to stocks.

“Monday will undoubtedly be a down day, but I don’t believe it will reach the panic proportions of last October,� said Hugh Johnson, chief investment officer at First Albany Co.

A key to Monday’s activity will be how overseas markets in Asia and Europe react to Friday’s plunge, analysts said.

Some individual investors, however, expressed hope that the market would rebound on Monday as bargain hunters entered the fray and investors regained confidence.

“If we keep talking about having a recession, it will be a self-fulfilling prophecy. We’ve got to have confidence,� said Joe Monaly, a Los Angeles certified public accountant.

Among actively traded issues, Sterling Drug fell $2 to $74, Texaco declined 75 cents to $38.125, AT&T; lost $1.50 at $27.75, Bell South fell $1.625 to $36, Du Pont skidded $7 to $81.125 and Eastman Kodak was down $5.25 at $47.50.

Staff writer Carla Lazzareschi contributed to this story.