October 28, 1997

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Stocks Fall 554 Points, Off 7%, Forcing Suspension in Trading

NEW YORK -- A worldwide plunge in stock prices erased more than 7 percent from the Dow Jones industrial average on Monday and forced the New York Stock Exchange to halt trading. The only other interruptions like this came after the wounding of President Ronald Reagan and the assassination of President John F. Kennedy.

No one knew just how far the market might have fallen had not market rules -- adopted in the wake of a stock market crash 10 years ago -- required the exchange and other American stock markets to close at 3:30 p.m., half an hour before the scheduled 4 p.m. closing bell.

The tumble further unnerved Asian markets as trading resumed there. After the midday break on Tuesday, Hong Kong stocks were down more than 12 percent -- the sharpest fall since 1989.

In Tokyo, the Nikkei index of 225 issues closed Tuesday down 725.97 points, or 4.26 percent, at 16,312.39. Other markets in Asia were sharply lower in morning trading.

The overnight fall on Wall Street raised concerns among investors in Asian markets that a prolonged downturn in the United States stock markets would reduce consumer demand for Asian exports. Traders also feared that the global selloff had not yet hit bottom.

As Hong Kong stocks plunged on Tuesday morning, Tung Chee-hwa, the chief executive of Hong Kong, called a crisis meeting of his Cabinet. Afterward, he said he considered the plunge to be temporary, telling reporters that "our fundamentals are strong, that is the most important thing."

On Monday, the Dow average ended down 554.26 points, or 7.2 percent, at 7,161.15, the worst day in a decade and the 12th worst ever. The drop was, however, only about a third as large as the 22.6 percent, 508-point drop on Oct. 19, 1987.

The latest plunge has been somewhat of a surprise to most American equity analysts. They had been closely watching the Federal Reserve Board and the economic statistics for any sign of rising inflation and of a Fed inclination to raise interest rates. There is little sign of danger on those fronts.

Instead, "The fear is of profit deflation emanating from Asia," said Doug Cliggott, the chief equity strategist at J.P. Morgan. Since July, several Asian currencies have fallen sharply, and more recently stock markets have followed. It appears that much of Asia, the world's fastest-growing region for much of this decade, is likely to see little if any economic growth in the near future. There is a risk that prices of many goods will fall as countries compete for dwindling export markets.

For much of the summer and early fall, even as Asian problems were growing, the American and European stock markets remained relatively strong. "Many market professionals thought the stock market was overvalued, but the market kept going up and the momentum kept them in," said Robert Barbera, the chief economist for Hoenig & Co. "Now they know it is overvalued and not going up anymore."

The Asian problems clearly threaten the profits of many multinational companies, but the reaction to them has also driven many investors into U.S. Treasury securities, as the safest investment around, and helped drive interest rates down.

That means, Barbera noted, that American investors may be feeling poorer with lower stock prices, but they will also be enjoying lower mortgage interest rates.

Since the Dow peaked on Aug. 6 at 8,259.31, it has fallen 13.3 percent. This is the first time since 1990 that the Dow has suffered a drop of at least 10 percent, based on daily closes. In the 1990 drop, which came as the country entered a brief recession and as Iraq invaded Kuwait, temporarily driving up oil prices, the Dow fell 21.2 percent in less than three months.

Monday's drop was considerably less severe than the worst loss of the 1929 crash, a 12.8 percent decline on Oct. 28, 1929 -- 68 years ago almost to the day.

Within the stock market on Monday, the fall was relatively orderly, in sharp contrast to the 1987 plunge. Traders said there was selling from nearly all types of traders, whether individual or institutional, domestic or foreign. Big Board volume was 685.5 million shares, the largest ever, but only a little above the previous session. Although it no doubt would have been higher had the market not closed early, so far the market has not seen the explosive growth in volume seen in the 1987 crash.

Both the New York Stock Exchange and the Nasdaq stock market said their systems worked well. It appeared that most people who wanted to trade -- at least before the markets closed early -- were able to. In 1987, that was not the case.

"The panic of 1987, which I think was fed by the fact that phones were not being answered and people could not find out what prices were, was absent here," said Frank Zarb, the president of the National Association of Securities Dealers, which runs Nasdaq.

Monday represented the first real test for so-called circuit breakers, added after 1987 in an effort to insure that prices would not plunge without reason and to give the public a chance to assess lower prices and consider buying stocks at cheap prices.

The Big Board's rule calls for a half-hour trading halt when the Dow falls 350 points and another hour if the loss widens to 550 points. With the first milestone hit, trading was halted at 2:35 p.m. Some had worried that it would be difficult to reopen after such a halt, possibly because of an imbalance of orders that came in during the break. That proved not to be the case -- only two Big Board stocks experienced any significant reopening delay -- but there was no relief from the downward pressure.

The market had halted with the Dow at 7,361.04. By 3:17, only 12 minutes after the market had reopened, the Dow was down another 100 points, and by 3:30 it had fallen a total of 550 points, and a few more by the time the closing order could be executed. Under the circuit breaker rules, the market could have reopened after a one-hour halt, but because the halt came after 3 p.m., the market closed for the day.

The most important test of the circuit breakers will come on Tuesday morning when the market reopens.

The Dow ended the day on Monday down more than most market indexes, although the selling was widespread. The Standard & Poor's index of 500 stocks fell 6.9 percent, the Nasdaq composite lost 7.0 percent and the Russell 2,000 index of smaller stocks was off 6.1 percent. Earlier in the day, all those indexes had been off significantly more than the Dow, which contains only 30 stocks.

It was possible that some selling in the Dow stocks came as the market neared the circuit breakers, with traders knowing that if the Dow stocks fell even a little more, all stocks would stop trading .

It appeared there was substantial selling of stock programs, or groups of stocks sold simultaneously by one trader. That may indicate use of some strategies known as "dynamic hedging," which call for traders to limit losses by selling as prices fall. The best-known form of program trading, called "index arbitrage," is now effectively banned when the market has a big move.

In 1929, the Big Board never closed early, although there were shortened trading hours and even market holidays, supposedly to catch up with paperwork. The only times in recent years when the Big Board has closed early due to concerns about prices were in 1963, when trading was halted in the aftermath of the assassination of President Kennedy, and in 1981, following the attempted assassination of President Reagan.

The slide in American stock prices has mirrored declines around the world that began with last week's sharp falls in Hong Kong. Nearly every market, from Britain to Brazil and from Australia to Austria, has fallen sharply.

Copyright 1997 The New York Times Company