A Tempered Enthusiasm

Like sunshine after a storm, a mood of calm confidence is brightening the stock market as it moves into the new year. Buoyed by cheering economic prospects, investors have pushed stock prices steadily upward for seven weeks in a row.

Last week the long rally gained new vigor. The New York Stock Exchange's Dow Jones industrial average spurted above the psychologically important 900 mark for the first time in three months. Volume in one session surged to 21.4 million shares, lifting a wide range of stocks, from blue-chip stalwarts to long-depressed aerospace issues like United Aircraft and McDonnell Douglas. At week's end less hectic trading had pushed the Dow Jones to 910, a gain of 112 points from last November's low.

The rise marks a complete flip-flop in investor psychology from mid-autumn, when prices were being steadily beaten down by a mixture of confusion about the President's economic-controls program and worry about the world monetary crisis. Then Phase II dawned without disaster, the dollar was devalued and the threat of a global trade war was dissipated. Now many market professionals expect a good year in 1972.

If so, the economy will clearly benefit. The stock market's swings have an unmeasured but perceptible effect on consumer and business confidence. A buoyant market would be of more direct help to the growing number of companies of all sizes that are trying to raise money by selling new stock. The volume of new stock issues has more than tripled in the past five years, to more than $10.5 billion in 1971 (see chart).

Wall Street experts are particularly keen on cyclical stocks like autos, steel, machine tools and lending institutions, which tend to rise and fall with the economy. Their reasoning: earlier predictions of a $100 billion gain in this year's gross national product are being reinforced by a proliferation of optimistic indicators.

One is the drop in interest rates on a broad front; last week most major banks cut their prime rate by yet another 1%, to 5%, enabling businessmen to borrow money at the lowest cost in almost six years. Consumers are also spending more freely, and factory orders are rising sharply. Foreign investors are pouring their newly revalued money into the market. Most important is a feeling that in an election year the President will do all that he can for the market by working to preserve an ample money supply and shoring up weak spots in the economy. Few parties have been returned to power when stock averages by Election Day have fallen below the previous January levels.

A main factor tempering brokers' enthusiasm is a gnawing concern about increasing Government control of the market. The 1970 bear-market debacle swept more than 100 brokerage firms into merger or bankruptcy and badly shook the faith of the investing public. Since then, the effectiveness of the industry's all but autonomous self-regulating agencies --the New York Stock Exchange and the National Association of Securities Dealers--has been sharply questioned.

Clumsy Process. Two weeks ago the Securities and Exchange Commission asked Congress to grant it greater statutory authority over the industry--a request that is almost certain to be approved.

For starters, the SEC has asked that it be given power to oversee the entire process of transferring stock ownership from one buyer to another. The unwieldy process now involves bankers and other transfer agents who are not directly subject to regulation. Failure to coordinate their efforts helped to cause the backlog of paperwork that did much to bring on the 1970 crisis. The SEC also wants the right to disapprove any new rules made by the self-regulatory bodies, to enforce the exchange's rules and, if warranted, to stiffen the penalties meted out by the exchange to erring members.

For the moment, Wall Street is quietly going along. There is some question whether exchange members will exhibit the same equanimity about the next set of SEC recommendations, due next month. These will deal with the far more abrasive issues of how much trading should be subject to negotiated rather than exchange-fixed commission rates, and whether institutional investors, such as mutual funds and insurance companies, should be admitted to membership in the exchange.

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