Looking Around the Corner

The stock market lives by its crystal ball. For the past five weeks, the belief that interest rates have passed their peak has lifted share prices and investors' spirits in approximately equal measure. The "baby bank rally," as brokers have dubbed the winter rebound, draws some of its support from cuts in the prime lending rate, from 8 1/2% to 8%, by a handful of small banks. Though executives of most major banks have scoffed at the reductions as premature, last week's mix of economic fact and forecast strengthened Wall Street's conviction that easier money is on the way. One indication: the Dow-Jones Municipal Bond index declined last week to 6%, the lowest level since last October.

A.W. Clausen, president of the Bank of America, predicted a one-half of 1% drop in the U.S. prime rate "in the next two or three months." He added that the rate could fall by a full percentage point during 1970, and perhaps more if the economy slows faster than expected.

Stocks that are sensitive to interest rates--housing and construction companies, utilities, savings and loan associations and banks--led last week's advance. On the New York Stock Exchange, the Dow-Jones industrial average rose 6 1/2 points this week, a gain of 40 points from its seven-year low of 744 on Jan. 30. The rally has been notable for its lack of speculative froth. Many glamour stocks have behaved erratically, up one day, down the next, while blue chips have surged ahead. General Motors, for example, gained $3 a share last week and long-depressed General Electric was up $5.

Although expectations of an end to the 15-month-old bear market have proved false before, many brokers now feel that a psychological barrier has been passed. "We're getting our shopping list ready," says Norton Reamer, vice president of Putnam Management Co., which runs eight mutual funds with $1.8 billion assets. "We're looking specifically for depressed stocks that would benefit from improved consumer spending, which we expect later this year." Kenneth Ward of Hayden, Stone, echoing a common sentiment among analysts, says: "It is bound to take time, but the market is beginning to look around the corner."

Economists consider stock prices to be a leading indicator of future business conditions. In the four recessions of the past 20 years, the stock market declined before the economy did and turned up anywhere from three to ten months before the economy. The tantalizing question is whether history will once again repeat itself. Hardly any analysts are yet willing to call the rally the start of a bull market, but the clouds do seem to be thinning a bit.

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