Love That Inflation

Inflation is a bogy word that has almost passed out of the news in a day when businesses have so much unused capacity around. But there was no mistaking the stock market's feeling about it last week: the market loves inflation. As the Dow-Jones industrial average rose 7.19 points, the market clearly showed that it once more sniffed inflation in the air--whether it was really there or not. Spurring the market's expectations were President Kennedy's request for the largest federal budget in history and his tax-cut proposals, which will help spur investment even while they contribute to a near-record peacetime deficit. And the Washington-dictated inflationary settlement of th East Coast dock strike led Wall Streeters to surmise that the brakes were at last off on labor's demands.

The market also has more parochial but equally important reasons for feeling confident about a continuance of one of its fastest rises in history (100 points in the last 61 trading sessions). Leading those reasons are the encouraging earnings reports coming from U.S. executive suites. Another omen is the flock of new stock issues beginning to appear in appreciable numbers for the first time since Blue Monday--a sure sign, says E. F. Hutton Partner Robert Stovall, "that businessmen think the climate of the market is going to be good."

On the Big Board, there has been a big falloff in short selling; in January, short sales hit a four-month low of 5,736,831. Short sellers borrow stock to sell in the expectation that prices will have dropped when it comes time to buy the shares to pay back the loan. To many, the falloff in short positions indicates that the professionals are currently not willing to bet that the market is going down.

Lending further strength to the market is the predominance of buy orders from the normally studious and shrewd managers of mutual funds and investment trusts. The little investor, who deals mostly in odd lots, is still selling more than he buys--and for cynical Wall Streeters, who believe the public is always wrong, this clinches the case for a bright future for stocks. But the loud debates sure to come in Congress over the tax cuts and budget deficit may convince even the amateurs that inflation is a danger once more. At such times, they usually take refuge in the market to protect their funds from erosion. Before this happens though, the professionals look for stock prices to slack off a bit from their recent rise--just enough to look like enticing bargains.

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