The Uncertain Prophet

"This market has got me bewildered," said University of Chicago Economist Milton Friedman last week. Friedman was in good company. Everywhere in the U.S., economists, brokers and ordinary investors were unhappily asking themselves why the stock market was persistently declining in the face of solid--if not spectacular-- growth in the general economy.

Since December, when the Dow-Jones industrial index hit an alltime high of 734.91, it has dropped with a speed that has left many a stomach queasy. Fortnight ago, the index fell even farther than it had in the week following Dwight Eisenhower's 1955 heart attack (see chart).

Then on Monday, May 14, came what Wall Streeters hopefully called "the selling climax." In one furious hour during the morning, selling reached near-panic proportions. The index went into a 14-point tailspin to a low of 626. The highspeed Teletype tape that reports New York Stock Exchange transactions was so swamped that it fell 34 minutes behind--its worst performance in nearly 30 years.

By that time, bargain-hunting professional managers of mutual funds, insurance-company holdings, trust funds, etc., began buying, and when the market closed for the day the beleaguered index had more than recovered its loss. But at week's end, it was still hanging listlessly at a dispiriting 650.

Nothing Negotiable. In attempts to explain the May 14 selloff, Wall Street analysts fell back on a melange of conventional reasons: the unsophisticated investor's fears of the Laos crisis, President Kennedy's treatment of the steel industry, and SEC's much-publicized investigation of Wall Street. The most popular verdict was that the market was "testing" its May 14 low point. If it broke through that low, the analysts solemnly explained, it would go still lower; if it did not, it would probably go higher. "This," gibed New York Times Financial Reporter Burton Crane, "is a somewhat complicated way of saying 'I don't know.' "

One analyst who took an unequivocal stand was San Diego's Richard Russell, who reads the market by the mystic light of the complex Dow Theory. He ominously noted that, for the first time since 1942, the Dow-Jones average had dropped more than 50% of the difference between its latest high and its previous low (566.05 in 1960). This, he argued, meant that the bears had finally taken over. "I do not pretend to know what we are now heading into," wrote Russell, "but I am now unwilling to hold negotiable securities of any type."

False Signals. Few students of the market were quite as pessimistic as Russell, but for those who believe that a downturn in stock prices heralds a recession four or five months off, what was happening on Wall Street raised unsettling questions about the economy in general.

In fact, the market is, at best, an uncertain economic prophet. Of its eleven significant downturns since World War II, only four have actually been followed by a recession. This time, many economists seem to believe it is wrong again. The most important economic indicators still point toward further gains for the economy, insists Harvard Business School's Professor John V. Lintner: "The market is giving out a lot of false signals in its short-term trends."

To Wall Streeters, however, a five-month decline in the market is more than a short-term trend. A surprising number of well-known analysts are now saying flatly that the great postwar bull market has, after 15 years, finally ended.

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