"Sell Everything Now!"

By John S. DeMott.

At least in financial circles, Sept. 11 will forever be famous for more than being the birthday of D.H. Lawrence, Ferdinand Marcos and Dallas Cowboy Coach Tom Landry. Shocking investors both here and abroad, the Dow Jones industrial average nose-dived 86.6l points last Thursday, the largest one-day drop in the history of the New York Stock Exchange. Bond prices also fell, although not so sharply, amid renewed market worries that the U.S. economy was about to face higher interest rates and increased inflation.

The big Thursday drop "shell-shocked" Houston Accountant Jerry Anhalt and hundreds of others in the financial community around the U.S. and kept Wall Street bartenders busy long after the close of trading. "So many people bailed out we couldn't keep track of what was happening," said one Big Board broker. "They would scream 'Sell everything!' before you could say hello on the phone." Not even the New York Stock Exchange computers could keep up with the activity, and transactions were running 30 minutes behind at noon.

Less than a week before, the four-year-old bull market had hit a new Dow peak of 1919.71. But that made stocks increasingly vulnerable to a long- dreaded deep "correction." Once the slide started last Thursday, it picked up incredible speed because of so-called program trading -- computer- triggered waves of selling. By 11 a.m., the Dow had sunk almost 30 points. "It was remarkable," said Marvin Breen, a trader for Merrill Lynch. "I looked up at the screen, and it was down 20 points. Five minutes later it was down 30. Five minutes later it was down 40. It just kept dropping." Breen's account was only somewhat exaggerated: by 2:30 p.m., the Dow's plunge had passed its earlier one-day record drop of 62, set in July, and had sunk to 74.

Caught unawares, brokers were at a loss as to what to tell clients, if clients would listen at all. "This is just sheer crazy," said Arthur Randall, a broker with E.F. Hutton. "You try to be cool and counsel patience. But what do you tell a client when in the course of the minute he's been on the phone with you the Dow has fallen 20 points?" Said Alan Klein, an investment-minded dentist from Roslyn Heights, N.Y.: "It was like a two-day root canal without anesthetic. You find me a patient who can keep cool under those conditions, I will find you an investor who can keep cool in this market."

People were frightened, and not just about stocks. Said Eric Fessler, a loan officer at Kadilac Funding, a mortgage and personal-finance institution in Carle Place, N.Y.: "I got flooded with so many calls I could not work. Half wanted to know whether interest rates will now shoot to the heavens. Another half wanted to know if the depression was coming."

At day's end traders, their neckties askew, craned toward banks of screens where blinking green numbers showed that the Big Board had struggled through the busiest day in its history. While the Dow was taking its 86.61-point dive, to 1792.89, trading volume on the New York Exchange hit 237.6 million shares, surpassing the previous record of 236.5 million reached on Aug. 3, 1984.

On Friday the sell-off continued in the morning. By midday a furious rally was under way, recovering more than half of Thursday's losses, but it soon fizzled. When the closing bell rang, the Dow had dropped an additional 34 points, swelling the week's loss to 141 points, the worst ever. Volume set another record, rising to 240 million. At the end of Wall Street's most hectic week, the Dow stood at 1758.72, down 161 from its September high. On the Big Board, losers outnumbered winners 4 to 1 on Friday. The American Stock Exchange and the over-the-counter markets also suffered steep drops.

The carnage was not confined to the U.S., since traders abroad are also worried about the prospects for the American economy. The tremor hit the London Stock Exchange, driving it down 27.3 on Thursday, its ninth greatest drop. In Ontario, the Toronto Stock Exchange dropped 2.4%, its largest one-day fall in 6 1/2 years. The day was "wild and woolly -- one of those rocket sessions," said Ron Woods of Merit Investment of Toronto. There was also a surge of selling on the Tokyo Stock Exchange, and even a fistfight. Two young traders punched each other as they fought to execute their sell orders.

Investors tried to put the bloodbath in perspective. While severe, it still left the Dow 212 points above what it was at the start of 1986 and a remarkable 1000 points above its level in August 1982, when the bull market started. Quantitatively, it was the largest falloff ever, but the 4.6% drop in share values on Thursday was nowhere near the chilling 12.8% plunge of the Great Crash on Oct. 28, 1929.

What caused the sell-off? Long-simmering worries about the health of the American economy, in the view of many experts, simply boiled over. A $200 billion budget deficit, says Brian Smith, a newsletter publisher in Alexandria, Va., would be roughly equal to the profits of all U.S. corporations, and nothing seems to make the deficit shrink. Said Albert O. Nicholas, president of the $1 billion Nicholas Fund in Milwaukee: "The economy isn't all that robust, and companies aren't coming up with the earning increases or even maintaining the earnings to support the stock-market euphoria that came about because of declining interest rates."

Many professional traders were mystified by the timing of last week's sell- * off. Said Michael D. Smith, senior vice president of institutional sales at B.C. Christopher Securities in Kansas City: "Nobody knows what's going on. Why did they discount American business 4.6% yesterday?"

A big role was doubtless played by rumors that created an explosive trading environment, like a roomful of ether waiting for a spark. One story, quickly squelched, was that Ronald Reagan had suffered a heart attack. Most of the other rumors involved speculation about renewed inflation and higher interest rates, the traditional enemies of stocks. At one point, word spread that two governors of the Federal Reserve believed interest rates, on a long two-year slide, had bottomed out. One broker was so confident of the information, which turned out to be false, that he told a client to call back in a few minutes for a full text of the Fed governors' remarks.

Other stories concerned leaked information from the Commerce and Labor Departments to the effect that retail sales for August would rise a brisk 2.5% and that prices, in retreat for months, would increase .5% at the producer level. These omens of impending inflation, the theory went, might persuade the Federal Reserve to take action by clamping down on credit and driving up interest rates. In fact, as the Government disclosed on Friday, sales were up only a modest .8%, while prices rose a mere .3%. But that news came too late to squelch the selling. The White House was sufficiently worried over investor fears to have Larry Speakes, the White House press spokesman, issue a statement saying the economy remains strong and all indicators point toward "brisk" performance in the second half of this year.

The plunge was accelerated by the impact of the relatively new phenomenon of computerized program trading. This strategy allows institutional investors to hedge their portfolios against what they think a stock will be worth in three or six months. Last week, when the bond market turned sharply down, and because of the rumored reports on inflation and interest rates, traders speculated that stocks would be worth less down the road. They rushed to sell the futures contracts on stocks, since they were expected to cost less later on. So great was the selling pressure that the price of stock futures fell below the prices of the underlying shares, and the stocks themselves came under heavy pressure. In great rushes, the selling pulled down the Dow and all other averages. In a single hour Thursday, from 11 a.m. to noon, 55 million shares were traded on the Big Board.

In Chicago, where stock-index futures are traded along with contracts for potatoes, grain sorghum and pork bellies, the customary disco-level noise in the pits rose a couple of times, but the day was quite manageable on the whole. Said Ken Brown, a trader on the Chicago Board Options Exchange: "It's like being a marathon runner. You train so you can run five miles easily, and then the marathon. Yesterday and today were full marathon days -- back to back." Stock futures have been criticized as the tail wagging the dog. "But in the last two days," says Drexel Burnham Senior Vice President Richard Sandor, "the dog has moved to Chicago."

Has the most robust bull market in U.S. history been slaughtered or just wounded? Some market watchers believe stocks have entered a correction phase that could last until next March. The Dow might drop below 1650, about where it was in February, says Mason Sexton, president of Harmonic Research, a Wall Street forecasting firm. "The direction is decidedly down," he says, but his long-term prognosis is encouraging: "We are in a medium-term correction in a megabull market. Those who failed to take advantage of the Dow's 600- point climb since October 1985 will have another, perhaps even more spectacular opportunity with the blue chips about five months from now."

Larry Wachtel, market analyst with Prudential-Bache Securities, counsels investors not to panic and sell on emotion. "Two or three months down the line, we'll finally realize that the economy needs help. It is still floundering. It needs another interest-rate cut. Rates will come lower, and the market will begin to rise." But even he admits that the next few months will not be for the fainthearted. Says he: "If you can't stand the heat, get out of the kitchen." Or the market. Many investors started getting out last week, and the ones who did not could only grow more edgy all the time.

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With reporting by Raji Samghabadi/New York, with other bureaus