One for the Bulls

After six straight weeks of being battered, Wall Street finally got what it desperately needed: a good week. The bears prowled the Street aggressively, their instincts sharpened by an 11% drop in the Dow-Jones industrial average that has cost investors $50 billion in paper values. But the bulls waited for the right moment to stampede. In some of the wildest, tensest and heaviest trading in years, the Dow-Jones industrial index last week rallied 35 points in the final four trading sessions. The close: 875.16, a gain of 21 points for the week. The market was so emotional and uncertain that not even the bravest bulls felt sure about how long or strong the rally ultimately would be, but there it was--a welcome change, too.

Tempting Prices. Early in the week, it looked as if the bears had triumphed. On the first trading day, the Dow-Jones slid 14 points, the worst fall since President Kennedy's assassination, and closed at a ten-month low of 840.59. At that point, stocks had been marked down so much that shares in the Dow-Jones index were priced at a low 16 times earnings v. 19 when the slide began in mid-May. A lot of investors, principally the big institutions, just could not resist the bargains.

Next day, the first hour's trading volume was the greatest in history: 2,630,000 shares. Stocks soared, plunged back on a midday news bulletin that Russia might step up aid to the Viet Nam Communists, then spurted again. Many small investors sold on the news from Moscow, but the institutions and professional traders kept buying. The market jumped eleven points that day, 17 points the next.

The close still left the industrial average some distance from mid-May's all-time high of 939.62, and few brokers expect that it will get back there soon. Many of them look for the market to meet resistance when it reaches the 890 level. Reason: a lot of individual buyers are waiting for stocks to rise just a bit more before they sell out and take their profits. For those in a buying or switching mood, brokers are generally recommending some oil, airline and insurance stocks, which have sold off more sharply than the market as a whole and have low price-earnings ratios. They also favor some issues in industries that seem likely to expand whatever happens to the U.S. economy, such as aerospace, chemicals, drugs, food, soft drinks, brewing and photography.

Word from the Top. Just a few weeks back, the stock market was outpacing the economy; now the economy is outpacing stocks. Does the market's recent weakness signal an economic downturn?

The market has been a surprisingly poor forecaster of postwar economic swings. It did not decline markedly before the slumps of 1949 or 1953, and it actually rose before the recession in 1957; it did, however, drop sharply prior to the 1960 recession. Stocks crashed in 1962, but the economy scarcely paused. There is a point when a deep and lengthy market drop can induce businessmen and consumers to save instead of spend, thus precipitating a recession. Washington's economic policymakers do not believe that matters have yet reached that danger point, and, if talk can do the job, they do not intend to let them reach it.

In their haste to praise the economy's present and future, President Johnson's economic aides could hardly wait for each other to finish. Commerce Secretary John Connor proclaimed early in the week that "business looks good," and pointedly blamed the market plunge on Federal Reserve Chairman William McChesney Martin's "1920s" speech. Next day, it was Treasury Secretary Henry Fowler's turn; he predicted "a sound, stable economy, healthy and expanding into the far future." Then President Johnson's close adviser, American Electric Power Co. President Donald Cook, weighed in with a forecast of a strong second half.

A Bell Ringer. The rosy official pronouncements were backed up by several bright business indicators. As the year's second quarter ended, the gross national product reached a record annual rate of $655 billion, about $2 billion more than had been predicted last December. Consumer spending in retail stores is up 8% and likely to go higher. Capital spending is up 12 1/2% for the year because a rising backlog of orders is straining U.S. business's productive capacity. There are, of course, some persistent rough spots: unemployment inched up to 4.7% in June and may go higher this summer; the cost of living last month climbed three tenths of one point to 109.6% of the 1957-59 average; and construction of housing has been weak.

Many an outsider, viewing the scene with perspective, wonders what the fuss is about. So eager was Britain's Exchequer Chancellor James Callaghan to express foreign faith in the U.S. economy (see WORLD BUSINESS) that he told a press conference in Washington: "The American economy today is as sound as the Liberty Bell." After an aide slipped him a note, Callaghan corrected himself. "I am told," said he, "the Liberty Bell has got a crack in it. Let's say something else. The U.S. economy is as sound as the Rock of Gibraltar."

This file is automatically generated by a robot program, so reader's discretion is required.