Wall Street

One of the more cynical theories of stock-price forecasting is that when Wall Streeters finally become unanimous in their opinions, the market promptly does the exact opposite. That theory might help explain the market's spectacular flip-flop last week. On Monday, prices fell faster than on any day since the assassination of President Kennedy; the Dow-Jones industrial average sank 21 points. By Tuesday night, after another large drop, the average was down to 63], its lowest since 1962. Brokers and investors, who had watched stock values drop $280 billion in the long bear market, expressed their total gloom in bitter jokes. Sample from a broker in Portland, Ore.: "I sleep like a baby. I wake up every hour and cry."

Then, on Wednesday, a record rally exploded out of nowhere. The Dow-Jones average soared 32 points, its biggest one-day rise ever.* Strong, though slightly less remarkable gains were scored on Thursday and Friday. Trading volume ballooned; Thursday's turnover on the New York Stock Exchange was almost 19 million shares. By week's end the Dow average had climbed 38 points to 700.

Calming the Worst Fear. Was this the signal that the worst bear market since 1937-38 has at last ended? No one will really know for weeks or even months. At first, brokers tended to distrust the rally, which began for no fundamental reason they could identify. Analysts talked of technical factors like a buying panic among short sellers, who had sold borrowed stock in the hope that the price would drop and then scrambled to cover their positions when prices began to rise. There were rumors, too, that for some mysterious reason important foreign investors had decided to pump $700 million into the U.S. market. At midweek, a more basic reason for optimism appeared in the form of remarks by Federal Reserve Chairman Arthur Burns at President Nixon's White House dinner for business chiefs (see THE NATION).

Burns assured the President's guests that the Federal Reserve, acting as a "lender of last resort," would supply enough cash to the economy to head off a financial crisis. The fear of such a crisis had in recent weeks become Wall Street's greatest nightmare. Financiers worried about a possible wave of bankruptcies among marginal companies that had exhausted their cash and bank credit while the Federal Reserve was holding the growth of money supply to zero late last year.

It is unclear how much of a policy change Burns' talk really represented. He noted at the dinner that the growth of money supply speeded up from 4% in the first quarter to a 10% annual rate in April. The May increase, he said, was 8%. Those comments spread an impression that the Federal Reserve would continue to expand money at much more than the 3% to 4% rate that Burns had previously indicated was his target. Perhaps--but the April and May increases were artificially large because of many factors, including the effects of the postal strike. Burns worries that putting too much money into the economy would fuel further inflation, and he said in Churchillian fashion at the dinner: "I have not become chairman of the Federal Reserve to preside over continued inflation in this country."

Sawtooth Swings. At least until Federal Reserve policy becomes clearer, the stock market's course is likely to remain confusing. For the immediate future, some analysts foresee a continued sawtooth pattern of exaggerated up-and-down price swings. This would reflect contrasting financial and psychological pressures on investors.

The strongest force working for market gains, apart from Burns' determination to avert a financial crisis, is a spreading belief among financial men that the long slide has hammered stock prices down further than is justified by anything that has happened in the economy. That feeling is strong among some financiers who attended Nixon's dinner and came away with at least temporarily restored confidence in the President's management of the economy. "There has never been justifiable cause for the huge drop in stock prices," says James W. Davant, a partner in the Manhattan brokerage house of Paine, Webber, Jackson & Curtis. "It is an over-reaction."

The Bears' Points. On the other side, the bears discern no improvement yet in fundamental economic factors. Quite the contrary: the Government reported last week that the wholesale price index rose slightly in April, after a month of stability that had stirred some hopes that inflation was at last subsiding. Pierre Mottoros, an analyst at Equity Research Associates, reviewed other basic investor worries: "The war is still on, corporate profits are still off, and there is a budget deficit larger than forecast."

Not much of the new cash that the Federal Reserve is putting into the economy seems yet to have reached investors. New York Stock Exchange officials figure that holders of margin accounts at the end of April had enough funds to buy an additional $4.9 billion of stock on credit--an impressive sum, but down from the $6 billion of shares they could have bought a year earlier. Only 49% of the Harris, Upham & Co. brokers participating in a recent company poll reported that their clients had "substantial" funds to invest, v. 66% to 80% in previous surveys.

Whichever way prices go, the effects will be felt far beyond Wall Street. A sustained rally could give businessmen and consumers a psychological lift as strong as the fright they have been suffering during the market's dive. The market does not only mirror investors' thinking about the economy; its swings also affect sales, production and jobs.

A continued climb in stock prices would help corporations to raise the money that they will need to build, expand and modernize. Up to now, the bond market has supplied much of the new cash for companies, and the market is loaded up with more issues than can readily be sold. Major corporations as well as newcomers will increasingly have to raise fresh capital by floating stock issues--and the issues would not sell well in a bear market.

A renewed stock-price break would discourage consumer spending and business investment, says Robert Nathan, a member of TIME'S Board of Economists. Harvard's John Kenneth Galbraith explains why: a deep slide would reduce the income of people who live on stock-market profits, and non-investors would "see this happening. The natural reaction would be to postpone expenditures." As for business spending on plant and equipment, Galbraith comments: "You cannot imagine a company like Ling-Temco-Vought [whose stock has plunged more than 90% in the past 19 months] making any substantial new capital expenditures."

An Open Mind. What more can the Nixon Administration do to reinvigorate the market? Many Wall Streeters and economists think that the President's best move would be an explicit pitch for voluntary wage-price restraint. They hold that such a program would reassure investors that the Government could curb inflation without throwing the country into a deep recession. Few economists have any faith in outright wage-price controls, which have usually proved to be inequitable. Some financial men returned from last week's White House dinner feeling that the President still wants nothing to do with mandatory controls, but Nixon said that he has "an open mind" regarding some sort of wage-price guidelines.

That position seems reasonable. Mandatory controls worked fairly well during World War II and the Korean conflict, but the Government could not now count on the patriotic fervor that increased compliance during those earlier troubles. "World War II was popular," says Arthur Burns. "Viet Nam is not." But some presidential definition of what sort of wage-price policies are in the national interest might well minimize pay and price increases. That would be far from a complete antidote to inflation. In the present atmosphere of doubt and confusion--which last week's White House dinner only began to dispel--it is at least worth a try.

* Though by the barest margin. The Wednesday gain was 32.04 points. The previous record rise, on the first trading day after President Kennedy's funeral, was 32.03.

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