Market Puzzle

The stock market presented a puzzle. After falling in eleven out of the 15 trading days this year, the Dow-Jones industrials were down 39.62 points from their alltime high of 685.47 on Jan. 5 before leveling off slightly at last week's end. The big question: Is the drop simply the winter chill that has hit the market along about this time in each of the past three years (see chart), or a sign of something more serious?

Part of the drop was undoubtedly seasonal. January is at best a "peculiar month," said Walston & Co.'s Edmund Tabell. "By the middle of the month, the market generally has taken care of the reinvestment demand generated by year-end tax selling and the market just sits back and relaxes." But that was not the only reason for the market's shivers. With short-term Government securities paying 5%, institutional investors were tempted to put somewhat more of their new money into bonds and less into stocks.

But experts saw no sign of stampede. The rally that pushed long-term governments up as much as two points above their January lows spent its force. Most of the list dropped back one-quarter to one-half of a point at week's end. To Tabell, this pointed up a truth: only when the gap between stock dividends and bond yields becomes extreme will investors swing bonds in preference to stocks.

Many an analyst thought the market might drift down another 15 or 20 points before finding the base for its next rise simply because, said Sam Stedman, partner in Carl M. Loeb, Rhoades & Co., many stocks at their recent highs were overpriced in terms of immediate earnings. To Stedman, the caution was a good sign. "I don't like it when everyone thinks that all the market can do is go up."

Looking ahead, many analysts saw the market consolidating for an early resumption of its rise. One strong force firmly applying upward pressure was the continued rise in earnings (see below). Said Josephthal & Co. Partner Sidney B. Lurie: "There is still vitality in the earnings uptrend which the market is perhaps underestimating at current levels. Personally, I expect much higher individual stock prices in the spring."

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