Rise in Stocks

The stock market's steep climb is beginning to cause more uneasiness than cheer. Last week, just after the market hit a 1958 high of 510.33 on the Dow-Jones industrial average, the Federal Reserve Board joined the ranks of the worriers. Noting that customer credit had increased by $746 million in the first half of the year, it raised margin requirements (i.e., the minimum cash payment required on stock purchases) from 50% to 70%. While the Fed thought its action would act as a damper on speculation, changes in margins have usually had almost no effect on the market (see chart). After a brief dip last week, the market closed the week at 510.13, only 11 points under the alltime bull market top. Stock Exchange President G. Keith Funston complained that the Fed's action was unnecessary, pointed out that despite the six months' rise, customer credit on non-Government securities was $4,226,000,000 in June, virtually the same as a year ago.

What has pushed the market up, in the eyes of most Wall Streeters, is not easier credit but the fear of a new burst of inflation. Many a Wall Streeter shares the Fed's worry, feeling that anxiety over inflation has lifted stock prices too quickly on the basis of current earnings. This has caused a sharp change in the "spread"--the difference between stock and bond yields. As stock prices have risen, bonds have dropped (see below); while the return on blue chips has fallen to 3.8%, the best bonds now yield more than 4%. In the past (1929, 1937, 1946 and last summer), when bond yields topped or equaled stocks, big investors went from stocks to bonds, weakening the market. Whether they will do so now depends on how strongly inflation fears continue. But many Wall Streeters see plenty of danger signals. Some views:

P: Samuel L. Stedman, partner in Carl M. Loeb, Rhoades & Co.: "When the market moves swiftly, thinking stops. When it slows down, the fundamentals of earnings and dividends will show up."

P: Daniel L. Gutman, partner in Zuckerman, Smith & Co.: "The market is enormously dangerous at current levels. There is a great deal of ignorant and superficial buying which is using inflation as an excuse. Unless inflation shows up in earnings and dividends, this reasoning is stupid. The market over the next six months will sell materially lower, touching last fall's 420 low."

P: Arthur Jansen, partner in W. E. Burnet & Co.: "The market is too high. At these levels it would take a couple of years for the improvement in earnings to catch up with market prices. If someone came to me with money to invest, I'd advise putting part of it in the bank."

P: Irving Kahn, partner in J. R. Williston & Beane: "When people pay 40 and 50 times earnings for a stock, they are multiplying when they should be adding."

Though Wall Streeters are uneasy about the swiftness of the rise, few expect a substantial selloff. Earnings and dividends are now more secure* than they were a few months ago, and many institutions are waiting for a dip to buy. What Wall Streeters call the "350 Club"--the bears who saw the industrials declining to that level last winter--has been dissolved; it has been reorganized as the "450 Club." But these analysts could be wrong again. "There are hundreds of professional investors and institutions who go down on their knees at night, praying that the market will return to 475 so they can get back in," said Michael S. Thomas, director of research for R. W. Pressprich & Co. "The market is asking for a correction, but on the upside I can see it going through the 520 level to 545, hitting 600 by the end of 1959."

If the Fed expected to protect the small, supposedly uninformed investor, its margin-raising action was not necessary. The small investor has been doing very well. For the past year the professional traders, large investors and stock specialists have been selling more than buying, in the belief that the market would go lower. But the small investor, as shown by the odd-lot (under 100 shares) records, has been buying more than selling, added a total of 13,679,000 shares to his holdings by midyear. In June many small investors began to cash in their profits. Since then, they have been selling more stock than buying.

*While 534 companies have reduced or omitted dividends to date in 1958, May marked the bottom of the dividend casualties. July cuts were the fewest of the year.

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