The Dow Jones Industrial Average fell 237.90, or 2.9 per cent, to 7,842.62. That put it at its lowest for three weeks, and 16 per cent down from the record level of July 17. The collapse in equities helped bonds, and the yield on the 30-year Treasury Bond was down to 5.00 per cent, the lowest since the bonds were first issued 20 years ago.
Financial services stocks led the market down, as concern continued that more banks may suffer hits from the collapse of Long-Term Capital Management, or that another hedge fund is about to fold. Rumours swept the market that Bankers Trust had huge losses, but the company said it had fully collateralised its loans to hedge funds.
On Tuesday, Chase Manhattan said its hedge-fund exposures totalled $3.2bn, of which 72 per cent was backed by cash and US Treasuries. Bankers Trust is thought to have a much smaller exposure.
The market was discomfited by the decision of the Federal Reserve to lower interest rates by a quarter of a percentage point on Tuesday, when many had expected to it go further. Banks were slowly adjusting their prime rates by a similar measure yesterday, but some were postponing a decision. With consumer confidence ebbing, retail stocks also had a difficult day.
Pessimism has hit the market for over a month now, as the crises in Asia and Russia take their toll on all the world's stock markets. US stock funds suffered their first net outflow in August for eight months, according to statistics released yesterday showing how individual investors took fright once the market began to slide.