Wednesday, the Department of Commerce reported that the United
States suffered a $15.7 billion merchandise trade deficit, which at that
time was one of the largest in U.S. history and far in excess of market ex-
pectations. The reaction in the financial markets was immediate. Yields
on long government bonds rose to over 10 percent for the first time since
November 1985, and the dollar declined sharply. The Dow Industrials
fell 95 points on Wednesday, a record point drop at that time.
The situation continued to worsen on Thursday and Friday as the
Dow fell 166 more points, to 2,246. Late Friday afternoon, about 15 min-
utes prior to close, heavy selling hit the stock index futures markets in
Chicago. The indexes had fallen below crucial support levels, which led
to the barrage of selling in Chicago by those wanting to get out of stocks
at almost any price.
The December S&P 500 futures contract fell to an unprecedented 6
points (or almost 3 percent) below the spot index. The development of
such a wide discount meant that money managers were willing to sell
large orders at a significant concession in order to sell fast, rather than
risk that their sell orders for individual stocks might sit in New York, un-
executed. At the close of trading on Friday, the stock market had experi-
enced its worst week in nearly five decades.
Before New York opened the following Monday, there were omi-
nous portents from the world markets. Overnight in Tokyo, the Nikkei
average fell 2^1 ⁄ 2 percent, and there were sharp declines in Sydney and
Hong Kong. In London, prices had fallen by 10 percent as many money
managers were trying to sell U.S. stocks trading there before the antici-
pated decline hit New York.
Trading on the New York Stock Exchange on Black Monday was
chaotic. No Dow Jones Industrial stock traded near the 9:30 opening
bell, and only 7 Dow stocks traded before 9:45. By 10:30, 11 Dow
stocks still had not opened. “Portfolio insurers,” described later in this
chapter, heavily sold stock index futures, trying to insulate their
clients’ exposure to the plunging market. By late afternoon, the S&P
500 Index futures were selling at a 25-point, or 12 percent, discount to
the spot market, a spread that was previously considered inconceiv-
able. By the late afternoon, huge sell orders transmitted by program
sellers cascaded onto the New York Exchange through the computer-
ized system. The Dow Industrials collapsed almost 300 points in the
final hour of trading, bringing the toll for the day to a record 508
points, or 22.6 percent.
Although October 19 is remembered in history as the day of the
great stock crash, it was actually the next day—“Terrible Tuesday,” as
272 PART 4 Stock Fluctuations in the Short Run