Trying to Jawbone the Stock Market

As the stock market plunged precipitously last week to the lowest point in 61 years, President Nixon made a statement that sounded much like the jawboning that he dislikes. He told a group of businessmen visiting the White House that there will be no recession. Then he added: "Frankly, if I had any money I'd be buying stocks right now." The comment was rather reminiscent of John D. Rockefeller's attempt to rally public confidence during the Great Crash.* The Rockefeller bullishness did scarcely anything to stem the market decline in 1929, but Nixon's remark did a little to crystallize sentiment that stock prices had reached bargain levels. It helped set off a technical rally in a deeply oversold market.

The Dow-Jones industrial average, which had plunged nearly 50 points in the five previous trading days, started to surge for the first time in five weeks. The rise was soon interrupted by the Defense Department's announcement that the U.S. would provide aid to South Vietnamese fighting in Cambodia. But the rally picked up steam again and was slowed only a bit by the President's televised pronouncement that U.S. troops were on the attack in Cambodia. The general feeling was that if the operation turns out to be limited and surgical, it will not overaffect the market. If it widens or lengthens the war, however, it could be disastrous--because Wall Street hates war. The market opened six points lower on Friday, but improved during the day to close at 734, down 14 points for the week.

Beautiful Losers. The President, whose economic advisers often have a cavalier attitude toward the stock market, is beginning to realize that the decline in stock prices is cutting painfully into the hopes and fortunes of Middle America. The 17-month-old bear market on Wall Street is the longest and costliest since World War II. The value of listed stocks held by 26 million Americans has dropped by more than $200 billion--an average $7,700 per investor. Many popular issues on the American Stock Exchange and the over-the-counter market have dropped by more than 50%, and some are down as much as 90%.

Almost everyone knows somebody who has suffered losses in the market. Many executives who took loans in order to exercise stock options how find their shares worth far less than the option prices that they had to pay for them. Among Hollywood's beautiful people, several big names are rumored to be bankrupt. Merrill Lynch reports that margin calls are running twice as high as during the 1966 market decline. When a customer gets wiped out by a margin call, he usually becomes angry at the broker who sold him stock on margin, and with good reason in cases in which the issues were overspeculative.

Panicky Rumors. Before the President's jawboning and the technical rally last week, the gloom over the long bear market had turned to despair in Wall Street. Panicky rumors flew--that several mutual funds were insolvent and dumping stocks, that several computer-leasing firms were about to go bankrupt. Goodbody & Co., a major brokerage house, had to deny that it was going out of business. Francis I. du Pont & Co. laid off 15% of its research staff; most of Shearson, Hammill's executives took pay cuts of as much as 50%.

The stock market decline has been reflecting increased public skepticism that inflation will be controlled without a recession and a prolonged period of brutally tight money. Richard Nixon, who believes that a recession cost him the 1960 election, is becoming nervous about the cool, academically oriented plan that his professorial advisers prescribed for putting the U.S. economy back on the track of steady growth and stable prices. Paul McCracken, the President's chief economist, contends that the economy has already bottomed out after two quarters of decline and is rising again.

This view is contradicted by a Federal Reserve Bank of St. Louis study. If the Federal Reserve Board expands the money supply at an annual rate of only 3%, the St. Louis bank projects, there will be a continuing decline in economic activity through 1970 and a recession extending well into next year. Unemployment, according to this projection, will reach 5.6% in the last quarter of this year and 6.7% in the winter of 1971. Most private economists, however, foresee a recovery some time this year.

Critical Number. Early last week the President sought to get some outside views by calling in five economists for a 90-minute bull session. The guests were Milton Friedman, George Katona, Pierre Rinfret, James J. O'Leary of Manhattan's U.S. Trust Co., and Lloyd Ullman, of the University of California. As the most outspoken defender of the Administration's strategy, Friedman was asked to forecast what unemployment would be this autumn. "Five percent," he replied. Said the President: "That's the critical number." To Nixon's surprise, it was recommended that he take a more active role in influencing individual wage and price decisions --something akin to jawboning--though Ullman and Friedman dissented strongly. The stock market came up as only one of many subjects, but Nixon's concern over it became apparent the next day when he expressed his wish to become a bargain hunter.

It will take more than talk to send the market back to where it was late in 1968. The nervousness of investors and the unhappiness of businessmen is caused to a considerable extent by a sense of disenchantment with the Administration. In addition, there is a broad feeling that student violence has hurt the market by undermining people's faith in the nation's future. Howard Stein, who manages the $2.2 billion Dreyfus mutual fund, is keeping $500 million in cash, waiting for the right time to invest. "If we thought there was some leadership coming out of Washington right now, we might be tempted to buy," says Stein. Many other mutual funds are also more liquid than usual; the total assets of all funds are now 8.5% in cash--$4 billion --compared with a normal 5% to 7% range. In sum, there is buying power waiting on the sidelines.

More than in the past, the market's course will be determined by the decisions of the funds. Along with other big institutions, they accounted for more than 60% of public trading volume on the New York exchange in last year's first half, compared with 47.5% in 1966. They may soon move in to scoop up bargains, but what they are really waiting for is easier money, a turnup in profits, a quieting down of the war and a greater sense of stability in a troubled economy--and a troubled nation.

-In 1929, after President Hoover had refused to say anything encouraging about the stock market, John D. Rockefeller made his first public statement in several decades: "Believing that fundamental conditions of the country are sound, my son and I have for some days been purchasing sound common stocks." Which prompted Eddie Cantor to crack: "Who else had any money?"

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