Full of Hope

Despite continued bad business news and the gloomy tone of President Kennedy's State of the Union message, the stock market last week spurted ahead in the broadest trading in history and the heaviest volume in many months, gained nine points for the week to bring the DowJones industrial average up to 652. Said one Wall Street broker: "The market is full of hope."

The market's hope is that President Kennedy will act wisely to remedy the nation's economic ills. While Kennedy's economic message to Congress (see NATIONAL AFFAIRS) did not offer as many remedies as his diagnosis seemed to call for, the financial community apparently liked the prescription. His proposals, the Wall Street Journal said approvingly, are "rather modest." "The salient impression made by President Kennedy's economic message to Congress is its orthodoxy," said John Hay Whitney's New York Herald Tribune. "It confirms once again the notion that his financial instincts are cautious and conservative rather than experimental or revolutionary."

Always Ahead. Actually, what some Wall Streeters refer to as "the Kennedy market" began at the end of last October, when Kennedy's chances seemed good. Since then, stocks have risen 86 points (50 since the election), regained almost all the ground that they lost in the 1960 late summer decline of 90 points. To date, the post-election gain represents a greater market advance than those that followed the election of Eisenhower in 1952 and 1956, and a reversal of the pattern after Truman's election in 1948, when stocks dipped until mid-1949.

Judging by past performance, the market may be forecasting a business upturn. Stocks have traditionally turned down several months prior to a recession, as judged by the Federal Reserve Board's index of industrial production, turned up several months before its end, as signaled by the index reaching the prerecession level (see chart). Downturns in stock prices have run ahead of slides in business 16 times out of 19 since 1870, and stock prices have risen before general business conditions on all but two upturns since then. Only once, in 1957, did the two peaks coincide. "Basically, the stock market is always three to eight months ahead of business," says Jacques Coe of Jacques Coe & Co. Coe is an odd-lot specialist who keeps track of all odd-lot buying and selling, an indicator of what the small investor is doing. The market has been broadened, says Coe, because in the last two weeks the public has begun to buy again. "Now there is a general feeling of confidence that business conditions will be better. The stock market is in a basic upswing."

No Protection. The upswing has been helped by the fact that there is plenty of money around looking for a place to settle--and plenty of investors who do not want to miss getting in on the ground floor of another strong upsurge. The institutions, many of which are only 75% invested, have sharply stepped up their stock buying; life insurance companies doubled their purchases in December. Actually, the Dow-Jones average of 30 industrial stocks does not completely show the extent of the current rise. The broader based Standard & Poor's index of 500 stocks last week reached an alltime high.

Defense stocks have taken a spurt on expectations of greater defense spending. Lockheed has risen 13 points from its 1960 low of 18--despite heavy 1960 losses --and jumped five points last week on news that the Administration plans to step up the Polaris missile program. The success of last week's Minuteman missile shot helped send up Boeing, the prime contractor, and Thiokol, maker of the first-stage engine.

Buying has been strong in oils, coppers, food, papers, machinery and steel. Some of the blue chips have taken part in the rise; IBM has jumped from 592 to 639 in a month, and American Telephone & Telegraph has gone from 104 to 113 7/8. But as a group, the blue chips still draw a wary glance from many investors. "They do not provide protection against the kind of cost-push inflation we have been having," says Bradbury K. Thurlow, vice president of Winslow, Cohu & Stetson, "and they are selling at inflated price-earnings ratios, which imply a future growth potential in earnings that cannot be logically shown to exist."

What Direction? Despite the rise, there was a wide difference of opinion last week about the market's direction in the near future. To the Dow theorists, last week's rise set the stage for a test of the indus trials intermediate high of 656.42, reached last June. According to them, if indus trials break through that point and are followed by the rails breaking through their previous intermediate highs (at 144.89, they were within two points of it), the market will be set to better its all-time high of 685. Though Dow theorists are in the minority on the Street, the Dow theory has some psychological effect on investors.

On the other side of the argument, many brokers feel that stocks are still too high-priced for any sustained advance. The market is 233 points higher than in October 1957, but stocks in the DowJones industrial average are selling at 20 times earnings v. twelve times earnings in 1957. "No major bull market ever started with stocks selling at this high level in relation to earnings." says Paine, Webber's Harry Comer. "And the market is facing a period of poor earnings reports that may blast investors' hopes." Wall Street has been oddly inconsistent in its reaction to that important barometer, earnings. When Zenith released poor nine-month earnings, its stock dropped from 103 to 99 3/8. Yet National Steel announced that 1960 earnings dropped from $7.28 to $5.53, and its stock gained 1 1/2 points in a day.

Thus the stock market is indeed advancing on hope, betting on an end of the recession by summer.

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