Dow roller-coaster shakes markets

As Americans flocked to see the movie Independence Day, the spectre of a crash on Wall Street hovered over the world's financial markets yesterday. Shares in London and elsewhere fell sharply as the US stockmarket continued the steep decline that began over the Fourth of July weekend.

Yesterday brought the fourth fall in succession, leading many financial analysts to conclude that the "correction" expected since the start of the year has finally begun. Earlier wobbles were reversed within a couple of days. Although Wall Street ended the day slightly higher, most commentators see the events of recent days as the start of a bigger collapse.

However, the experts do not expect a repetition of the October 1987 crash. The curbs on computerised trading, introduced after that disastrous fall of 23 per cent in the Dow Jones share price index within a single day, mean that a drop in share prices looks more like a bungee jump than a nosedive these days. A big fall in prices is likely to be followed by a modest rebound.

This happened during the course of yesterday's trading, with an early drop of more than 166 points in the Dow Jones erased to a mere 16-point fall by lunchtime and before an afternoon decline and rise.

Even so, the value of shares in the US has fallen by nearly 7 per cent since Independence Day, making it the biggest event in world financial markets for more than two years. Share prices in London fell by more yesterday than at any time since John Redwood challenged John Major for the Tory leadership last July. The trigger for Wall Street's slide is the fear that the Federal Reserve, America's central bank, might soon raise interest rates to prevent the booming economy from stoking inflationary fires. A rise in US interest rates would, as happened in 1987, upset the balance between investing in shares (at present expensive because of the long bull market) and investing in bonds.

This year there are perhaps more parallels with the Great Crash of October 1929 than with its more recent cousin. The Great Crash was only half as big as the 508-point fall in the Dow Jones on 19 October 1987. But its economic impact was magnified by the fact that it was mainly small investors who held the shares. Those who did not end their misery by leaping from windows high above Wall Street reacted defensively by tightening their belts. The Great Crash was the vanguard of the Great Depression.

Although the stockmarket today is dominated by large pension fund companies, as is the case in Britain, it has seen more individual investment through "mutual funds" this year than at any time in recent history. Companies such as the giant Fidelity Investments yesterday reported that shareholders are starting to withdraw from these funds.

The financial world is nowhere near as precarious now as it was in 1929. No one seriously expects a depression. But a substantial blow to the value of small investors' holdings could prove a blow to the entire economy.

Full story, page 16

Comment page, 17