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Other stories concerned leaked information from the Commerce and Labor Departments to the effect that retail sales for August would rise a brisk 2.5% and that prices, in retreat for months, would increase .5% at the producer level. These omens of impending inflation, the theory went, might persuade the Federal Reserve to take action by clamping down on credit and driving up interest rates. In fact, as the Government disclosed on Friday, sales were up only a modest .8%, while prices rose a mere .3%. But that news came too late to squelch the selling. The White House was sufficiently worried over investor fears to have Larry Speakes, the White House press spokesman, issue a statement saying the economy remains strong and all indicators point toward "brisk" performance in the second half of this year.
The plunge was accelerated by the impact of the relatively new phenomenon of computerized program trading. This strategy allows institutional investors to hedge their portfolios against what they think a stock will be worth in three or six months. Last week, when the bond market turned sharply down, and because of the rumored reports on inflation and interest rates, traders speculated that stocks would be worth less down the road. They rushed to sell the futures contracts on stocks, since they were expected to cost less later on. So great was the selling pressure that the price of stock futures fell below the prices of the underlying shares, and the stocks themselves came under heavy pressure. In great rushes, the selling pulled down the Dow and all other averages. In a single hour Thursday, from 11 a.m. to noon, 55 million shares were traded on the Big Board.
In Chicago, where stock-index futures are traded along with contracts for potatoes, grain sorghum and pork bellies, the customary disco-level noise in the pits rose a couple of times, but the day was quite manageable on the whole. Said Ken Brown, a trader on the Chicago Board Options Exchange: "It's like being a marathon runner. You train so you can run five miles easily, and then the marathon. Yesterday and today were full marathon days -- back to back." Stock futures have been criticized as the tail wagging the dog. "But in the last two days," says Drexel Burnham Senior Vice President Richard Sandor, "the dog has moved to Chicago."
Has the most robust bull market in U.S. history been slaughtered or just wounded? Some market watchers believe stocks have entered a correction phase that could last until next March. The Dow might drop below 1650, about where it was in February, says Mason Sexton, president of Harmonic Research, a Wall Street forecasting firm. "The direction is decidedly down," he says, but his long-term prognosis is encouraging: "We are in a medium-term correction in a megabull market. Those who failed to take advantage of the Dow's 600- point climb since October 1985 will have another, perhaps even more spectacular opportunity with the blue chips about five months from now."