Several Factors Led to Dow's Sudden Plunge

Traders work on the floor of the New York Stock Exchange Tuesday. i i

hide captionTraders work on the floor of the New York Stock Exchange Tuesday.

Stephen Chernin/Getty Images
Traders work on the floor of the New York Stock Exchange Tuesday.

Traders work on the floor of the New York Stock Exchange Tuesday.

Stephen Chernin/Getty Images

Investors are waiting to see whether the big plunge in stock prices Tuesday will turn out to be a one-time thing, or the start of a real correction in the U.S. market.

The Dow Jones industrial average lost more than 400 points, reflecting worries about the state of the U.S. and Chinese economies. And there was a breathtaking drop in prices late in the afternoon that might have been tied to a computer glitch.

The stock market has been placid in recent months, with few of the big swings in prices that characterized stocks five or six years ago.

Tuesday, the idyll came to a crashing end. All day, prices fell — and fell more. Then, at about 3 p.m., there was a sudden dizzying drop in the Dow that called to mind the 1987 crash. Market strategist Kevin Caron of Ryan Beck wasn't sure what to make of it.

"It was a very fluky thing to watch, we were looking at the market down roughly 290, 295, 300 points," Caron said. "And suddenly, within a very short period of time, literally half a second, we saw the markets were down over 400 points. At first glance, it looked like it might have been a misprint."

At Standard and Poor's, chief investment strategist Sam Stovall was equally bewildered.

"I was quite taken aback by the magnitude of the numbers reeling off — it was almost as if somebody was spinning an odometer illegally," Stovall said.

The Dow finished the day down 416 points — a decline of 3.3 percent. As it turned out, that swift mid-afternoon drop may have been tied to a computer problem. The New York Stock Exchange said that it had experienced intermittent trading delays and was looking into whether they caused prices to drop.

If a computer glitch did happen, it can explain only a part of the market's troubles Tuesday.

More troubling was word that Chinese authorities may be ready to crack down on stock speculation. That sent the Shanghai market into a freefall. Stovall said it's not that China is such a big part of the world economy, but he says investors have come to see China as a kind of magical place. Any suggestion of trouble there scares a lot of people.

"Growth is very important in China, and that's where a lot of the demand for materials, for industrials and for just overall worldwide GDP," Stovall said. "And so if you have a problem in the main engine, then I think investors would be concerned."

There were also warning signs on this side of the globe. A report issued Tuesday morning said durable goods orders fell much more than expected in January. There have been signs that lenders are beginning to tighten credit standards, which can hurt growth prospects. Former Federal Reserve Chairman Alan Greenspan was quoted this week as saying that a recession could occur in the United States later this year. Caron said Greenspan may be right.

"We think that the evidence is now pointing increasingly to a softer, almost a rough patch, for the economy later this year, or next," he said.

But a lot of other market-watchers said the reaction to Greenspan's remarks was probably overblown.

Tuesday might have produced one of the biggest one-day point losses for the market, but in percentage terms, it was less than historic. Tim Ghriskey of Solaris Asset Management says the market may have fallen about as much as it's going to. As dramatic as Tuesday's drop appeared, he says there's reason for optimism. For one thing, Ghriskey said, there's still a great deal of liquidity in the market.

"There's still a lot of players in the market with a lot of cash that needs to be put to work, and a lot of acquisitions and mergers that are likely to occur, and push stocks higher over the coming months," he said.

If so, Tuesday's decline will be soon forgotten. It would be seen as one of those periodic shifts that temporarily spooks investors and reminds them just how painful the market can be.

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