(2 of 4)
As feared, the disappointing trade figures inspired global money traders to send the dollar sliding against the yen, deutsche mark and other currencies. On the bond market, interest rates on 30-year U.S. Treasury securities topped 10% for the first time in nearly two years. Wall Streeters responded by pushing the Dow down 95.46 points on Wednesday. That prompted Treasury Secretary Baker to try to soothe the roiling financial markets on Thursday. Baker described fears of rekindled inflation as "overblown." Though "we recognize of course some market nervousness," he added, "conditions do not warrant Apocalypse Now worries or scenarios." Just before he spoke, however, Manhattan's Chemical Bank raised its prime lending rate for the second time this month, from 9.25% to 9.75%. That day the Dow dropped an additional 57.61 points.
The real rout came Friday. Bent on selling, stockholders brushed off any signs of reassurance, like the Labor Department's announcement that wholesale prices had risen only .3% during September. That normally would be seen as a sign that inflation remained in check. Instead, investors showed concern about a Baker remark from the previous day. Railing against West Germany's central bank for raising its interest rates, the Treasury Secretary led many listeners to believe that the German action might cause the dollar to move lower.
On top of that, another new anxiety developed when the attack on a U.S.-registered tanker in the Persian Gulf pushed crude-oil prices above $20 a bbl. for the first time in six weeks, increasing inflation fears.
Before long the Dow went into a virtual free fall. At one point the stock index was down a breathtaking 131 points. Selling was so furious that the New York Stock Exchange set a one-day record for volume, 338.48 million shares, shattering the old mark of 302.39 million set in January. Nearly all stocks got caught in the downdraft: 1,749 fell, and only 111 managed to rise.
The steepness of the plunge sent market watchers to the history books for some perspective. The drop in the Dow since August represents a decline of 17.5%, but that is still far behind the 35.9% correction in 1968-70 and the 80% wipeout during the Great Depression. Still, the paper losses are staggering. The stocks that comprise the Wilshire 5000, which includes most U.S. issues, have fallen $486 billion in market value. But they are still $379 billion ahead of their value at the beginning of the year, and the Dow industrials remain up 350.78 points, or 18.5% from the Jan. 1 mark.
Wall Street has long been aware that America's trade and budget deficits could drag down the economy. The trade gap, $156 billion last year, has proved especially slow to remedy. The decline of the dollar was supposed to boost exports by making U.S. products more affordable overseas and to discourage imports by making them more expensive for American consumers. But during August exports dropped 3.7%, to $20.2 billion. One reason for the weak overseas demand for U.S. products is the sluggishness of global economic growth in industrial countries and developing countries alike. While imports in August dropped 4.2%, they persist at a staggering $35.9 billion. The import bill remains high in part because Americans have been reluctant to give up their craving for imported goods, even though the cost has gone up.