A Second Wind

For nine months, the stock market has raced relentlessly uphill from its grim low, advancing more than 40% in that period, and some Wall Street seers have been predicting an inevitable pause. But early last week, like a long-distance runner gaining a second wind, the market burst ahead with fresh energy. The Dow Jones industrial average posted its biggest daily gain of the year, leaping 9.86 points and closing above the psychological barrier of 900 for the first time in 21 months. For the week, the Dow rose 15 points to close at 913. Stocks on the American Exchange also made impressive gains.

The market's steep and prolonged rise still leaves it vulnerable to a setback. A jarring bit of news could stampede investors into a rush of profit taking. Nonetheless, optimists see the climb continuing, and many are talking about cracking the long-anticipated 1,000 level on the Dow.

Leading last week's broad advance were stocks of companies in retailing, television, oil, tobacco and electronics. High technology securities, especially those of the computer manufacturers, did well. Many of the blue chip and reliable glamour stocks have already been swept up in the sharp recovery and are no longer bargains. Thus, investors are now moving into less stable issues; potentially dangerous speculation is on the rise. Small investors continue to shy away from the market, and institutions remain by far the big buyers. They are pouring more of their daily cash inflow into the market than at any time in the past two years.

A number of factors are contributing to the market's advance. The persistent descent of interest rates is deflecting capital out of fixed-income investments and into stocks. The upsurge in the market itself creates a buoyant atmosphere for investing. Mildly improving corporate profits add to the sense that business is becoming better. Still, in the view of some analysts, the market has run ahead of economic reality. Henry M. Farrell, portfolio manager for the First National Bank of Columbia, S.C., contends that prices for many stocks are discounting 1972 and 1973 earnings. "The way things are going," he says, "we may soon be paying for 1974 profits before we know what 1971 is all about."

Prospects for 1971 are not exceptionally strong. True, housing starts and steel and auto sales are up, though automakers are scaling down their prediction that 10 million cars will be sold this year. In general, the economy continues to limp.

Lead into Gold. The market's rise is based largely on hope. Says Peter Vlachos, Dreyfus Leverage Fund's manager: "The market is now anticipating that the Administration's reflationary measures will work, that full employment will be restored, and that inflation will not return to its former gallop." Investors figure that if the economy continues to lag and drag, the Administration will have to reduce taxes (see page 82). Sifted through this kind of faith, even leaden news is transformed into gold. Investors even took an optimistic view of last week's report that the industrial production index declined from 165.4 in January to 164.8 in February. They reasoned that this would forestall any change in the Federal Reserve Board's moderately expansive money policy.

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