Fear and panic of historic proportions overwhelmed the stock market Monday, forcing the Dow Jones industrial average to a stunning decline of 508 points, by far the biggest one-day plunge in history.
The Dow Jones average lost almost a quarter of its value, nearly doubling the percentage drop that occurred on Oct. 28, 1929, the crash that preceded the Great Depression. With Monday's fall, the Dow has lost half the ground it had gained since the bull market got under way on Aug. 12, 1982, when the Dow stood at a mere 776.92.
The collapse came on dizzying trading volume of 604.4 million shares on the New York Stock Exchange, nearly double the previous record of 338.5 million shares, set last Friday.
The unprecedented dive in the Dow, to a close of 1,738.74, immediately raised fears of an international economic crisis and a recession in the United States. Mutual funds, pension funds, foundations, endowment funds, retirement accounts, stock brokerage firms, individual investors and others together lost hundreds of billions of dollars, and the impact could reverberate throughout the U.S. economy.
Monday's debacle alone wiped out $503 billion in the market value of all stocks. A total of about $1 trillion in stock market wealth has been erased since the market peaked on Aug. 25, as measured by Wilshire Associates of Los Angeles.
Japanese and other foreign investors, who helped drive the bull market's rapid rise of the last five years, unloaded stocks en masse, triggering worries that they might pull money out of other U.S. investments also.
Government Action Urged
The collapse spurred calls among Wall Street and congressional officials for dramatic government action, ranging from pumping more money into battered financial markets to regulation of certain market practices that may have aggravated Monday's free fall.
In addition, Wall Street experts expressed fears of severe financial squeezes, if not outright bankruptcies, among Wall Street firms and others that had bet on higher stock prices or had borrowed heavily to finance stock purchases.
The sharp declines may be far from over. In an ominous sign that the Dow could undergo another sharp tumble today, prices of Japanese stocks plummeted by record amounts in early trading this morning amid sell orders so overwhelming that more than 95% of Tokyo Stock Exchange stocks could not open for trading in the first few hours.
Nose dives in Asian and London markets usually trigger similar declines in the American market, as they did Monday. Any sharp decline in Japanese shares could force investors there to pull money out of U.S. stocks in order to cover their losses, further depressing the U.S. market.
"It was a financial meltdown as good as any that has come along," said John Phelan, chairman of the New York Stock Exchange, in describing Monday's rout as the financial equivalent of the Chernobyl nuclear disaster in the Soviet Union last year.
"What we have is an economic crisis of international proportions," said John D. Connolly, chairman of the investment policy committee of the brokerage of Dean Witter Reynolds in New York. He and other financial experts said the U.S. Federal Reserve Board and foreign monetary authorities must move quickly to pump money into financial markets to drive down interest rates and shore up weakened financial institutions.
Monday's collapse shattered the previous record one-day point drop in the Dow average of 108.35, set on Friday. Monday's drop equaled a decline of 22.61%, exceeding the percentage declines of 12.8% on Oct. 28, 1929, and 11.7% the next day. The record percentage decline occurred on Dec. 12, 1914, when the Dow lost 24.4% of its value.
Since Aug. 25, when the Dow average hit a record 2,722.42, the index has declined 983.68 points, or 36.13%. The Dow now stands at its lowest point since April 7, 1986.
Massive Trading Volume
Stocks plunged in markets worldwide Monday as fear of higher interest rates and higher inflation, increased Middle East tensions, lack of confidence in the Reagan Administration's economic policies and other woes gripped individual and institutional investors. Prices of commodities plunged as well.
The crash led many experts to declare the 5-year-old bull market dead and buried. More important, some economists and others said that the crash, just like its counterpart in 1929, could spark enough of a decline in consumer and business confidence and spending to trigger an economic slowdown, if not an outright recession.
"The market is saying we will have a recession next year," said Allen Sinai, chief economist with Shearson Lehman Bros., noting that recessions are almost always preceded by bear markets.
Individual investors were left stunned. "I'm a dead bull," said one investor at the downtown Los Angeles brokerage office of Charles Schwab & Co. The investor said he had lost all his savings but refused to give his name.