How High Is Up?

With charts, slide rules and popping eyes, Wall Streeters have spent the last nine months measuring the stock market. To many, the market has seemed a freak: it started to rise just when business began to contract last fall, now towers above anything seen since 1929. Since September, the Dow-Jones industrial average has pushed 25% higher almost without pause, last week rose to a new high of 328.67 before shading off. What made the giant grow? Is there a giant killer lurking around the corner?

When measured against its postwar record, the market's action is not so freakish. Since the war, it has been not so much a barometer of future business as a measure of how businessmen feel about the future. In 1946, 1947 and 1949 they expected a recession, and the market cracked, though no serious slump ever came. Now, despite the slide in production, businessmen are optimistic, and the market has gone up.

War Boom? Meanwhile, the Stock Exchange has campaigned hard to sell common stocks just as the supply was being diminished by the influx of such buyers as pension funds and investment trusts, who take the stock off the market. The death of the excess-profits tax, easy money, and the prospect of continued fat dividends as well as lower taxes on them--have also made stocks look like better buys.

Some traders have attributed the market rise to the rearmament program, simply because the aircraft stocks have turned in the most sensational performance of all, rising 80% since September. But the fact is that overall. Standard & Poor's index of "war stocks" (e.g., shipbuilding) has risen 35% in that time, and peace stocks have almost kept up (30%).

Next to the aircraft stocks, the market's best performers are a group of issues riding the new electronics boom, e.g., General Electric (up 68%) and Westinghouse (up 73%). Since September, the electrical-equipment stocks have jumped an average 59%.

Pretzels & Pin Setters. A big reason behind the market's rise is U.S. industry's proved ability to adjust itself to changing times, turn out new products and create new markets. Under dynamic management, many a company has diversified so fast that it has not even found time to change its name to keep pace with its progress. Examples: Minnesota Mining (up 55%) moved from fluorspar to Scotch tape, now makes recording tape to boot; American Machine & Foundry Co. (up 26%), which started out making cigar machinery, now produces everything from bowling pin setters to tie-stitching machines and pretzel twisters. Even the steel industry (whose stocks are up 38% since September) is tentatively edging into the plastics field.

Competitive Punch. In keeping with the times, penny uranium stocks have had a boom all their own (TIME, April 5). And on the Big Board such companies as Vanadium Corp. (up 83%) and Climax Molybdenum (up 44%) have risen as they have got into the uranium business. Other big gainers: oil and rubber (up 37%), insurance (up 40%), office equipment (up 43%). Of 35 major stock groups, only the tobaccos have declined since September, and their 16% drop can be traced directly to the lung-cancer scare.

But while industry groups have risen, by no means all the stocks in the groups have done so. The big push has been made by the blue chips, so hotly sought after by pension funds and other institutional investors. Lower-priced stocks, which soared 537% from 1942 to 1946 (almost five times more than high-grades), have enjoyed no such rise this time. They have advanced only half as much as the quality issues. Of the 1,536 stocks on the New York Stock Exchange, some 60% are at or below their 1946 highs. A prime example is the auto group, up only 2% since September. But the rise is due entirely to General Motors (up 32% to $71).

Too High? Has the market gone too high? One of Wall Street's favorite measurements is the ratio between stock prices earnings and dividends. On this basis' some of the booming blue chips have become expensive. At $125, for example, Du Pont is paying only 3%, as is Union Carbide ($83). But others are still reasonably priced, on the basis of both dividends and book value. At $47, U.S. Steel is not only paying 6.3% but is selling far below its asset value of $76.39 a share.

Wall Street's bulls point out that the market's rise has not been heavily speculative. Brokers' loans stand at only $1 billion, v. $8.5 billion in 1929. And while the short interest of 2,849,000 shares is the highest since 1932, this bearishness helps keep the market up. For in any price drop, many bears will buy stock to cover the shares they have sold short, thus help limit the decline.

Compared with the price-earnings-dividend ratios of other years, the market does not seem too high. In 1929 stocks yielded an average 3.24% dividend, and 3.55% in 1946; now they yield 4.91%. At the peak of the boom 25 years ago, the stocks in the Dow-Jones industrial average were priced at 19.45 times earnings, and in 1946 at 17.46 times earnings. Now they are priced at only 11 times earnings. Wall Street's bulls translate the figures this way: if stock prices stood in the same ratio to earnings as they did eight years ago, the Dow-Jones industrial average today would not be 328 but 520.

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