"It's extremely emotional. People are dumping stocks with reckless abandon. As trite as it may sound, the market is going down because it's going down."
-- Newton Zinder, analyst for E.F. Hutton
The process is called a "correction," which makes it sound like a painless, orderly affair. But last week's bloodbath on Wall Street was more aptly dubbed an "October massacre." Turmoil and outright fear shook the financial markets as stampeding hordes of investors got caught up in a mood that had been almost absent during the go-go 1980s: bearishness. Over the course of less than two months, in the worst setback since the bull market began five years ago, the value of U.S. stocks has plunged by nearly half a trillion dollars.
The market's rapid conversion from boom to gloom may well signal a fade-out of confidence in America's long-running economic good times. Despite reassuring words from the White House and Treasury Secretary James Baker, the unruly mob on Wall Street saw only the threat of rising interest rates and faltering economic growth. "I fear we will have the worst of possible worlds, with high interest rates and a recession," said Rudy Oswald, chief economist for the AFL-CIO.
Stock-market investors were the first to feel the pain. Records fell to the stock-market floor last week like so much scrap paper. On Friday the Dow Jones industrial average plummeted more than 100 points for the first time in history, dropping 108.36. In just one day, the value of 5,000 common U.S. stocks slid $145 billion, or 4.9%. "We're all stunned. Everything happened so fast," declared Byron Wien, portfolio strategist for the Morgan Stanley investment firm. Wall Street's computer-trading mechanisms, which brought so much efficiency to a rising market, were working just as efficiently in reverse. During the week the Dow fell 235.48 points, a record for a single week, closing at 2246.73. Since Aug. 25, when the Dow peaked at an all-time high of 2722.42, it has given up 475.69 points.
Investors were already poised at the brink of panic, looking for reassurance, when the announcement of a key statistic set them running. The Commerce Department said on Wednesday that the U.S. trade deficit, the closely watched barometer of America's competitive woes, failed to improve as much as investors had hoped: the imbalance between imports and exports fell from the record $16.5 billion in July, but only to $15.7 billion in August. Investors concluded that if a 30% drop in the dollar over the past two years has failed to help cure U.S. trade problems, then perhaps the currency would have to fall further. And any greater drop, they reasoned, would surely aggravate U.S. inflation and interest rates.