Wild Bears On the Loose

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There it was again -- the harrowing, sinking feeling that has become all too familiar on Wall Street. Pessimism verging on panic. Stock prices plunging in a free fall. Last Friday the Dow Jones industrial average suffered its third largest drop in history, plummeting 140.58 points to close at 1911.31. Fortunately, the worst of the rout began after 2:30 p.m., and there was not enough time for a full-fledged disaster before the New York Stock Exchange's 4 p.m. closing bell. By the end of the day, however, traders could not help but think back to the 108.36-point fall on Friday, Oct. 16, that set the stage for Black Monday, Oct. 19, when the Dow fell 508 points. The question on everyone's mind: Could it happen again?

Friday's decline more than wiped out the four previous days of healthy stock advances spurred by an unexpected rally of the dollar, which was bolstered by the intervention of central banks in the currency markets (see following story). For the week, the Dow was down 27.52 points. As usual, there was a logical, if contorted, economic explanation of why investor sentiment so abruptly turned bearish. The problem started when the Government announced that the U.S. unemployment rate had fallen from 5.9% in November to 5.8% in December, its lowest level since 1979. To most people, that sounds like good news, but nobody has ever accused Wall Streeters of thinking like most people. To a bond trader, lower unemployment means faster growth, more inflation and higher interest rates. So bond prices slumped, and that triggered a drop in stocks. Investors were also concerned because the dollar started dipping again on Friday and because they feared that Government figures on the mammoth U.S. trade deficit due for release this week would show little or no reduction.

But none of this could adequately explain why the Dow dropped 90 points in just 45 minutes late on Friday. Experts quickly pointed out that the slide was accelerated, as other swings have been during the past two years, by computerized program trading of large blocks of stocks and stock-index futures. The debacle raised anew questions that have been hotly debated since October: Is the new high-tech volatility of stock prices out of control? Are investors vulnerable to a crash at any time if reforms are not undertaken to shore up the market's stability?

In the aftermath of Black Monday, more than a dozen investigative bodies have been probing those issues. Last Friday, in a case of remarkably appropriate timing, the most prominent of these groups -- the Presidential Commission headed by Investment Banker Nicholas Brady -- released its eagerly awaited report just after the market closed. The conclusion of the five-member commission* was clear: sweeping reforms are in fact needed to guard against market meltdowns.