Mental Block

If stock prices are a leading indicator, as they are often considered to be, then the U.S. economy is in for a roller coaster ride. After starting from a low of 889 in January, the most widely watched gauge of the market, the Dow Jones industrial average, has thumped along like an excited heartbeat, often surging up or down by 15 or more points in a day. During the first half of the year, the general trend had been up, but now a new pattern is emerging: in each of the last two weeks the Dow has spurted to a 44-month high of slightly under 974, then fallen back. Last week's drop was precipitous, carrying the index to a close of 959.

In fact, the average seems to be reflecting mostly investors' emotional state. Last week's fall illustrated Wall Street's supersensitivity to any hint of tight money. It occurred after the Chase Manhattan Bank raised its prime rate on business loans by one-quarter of 1% , to 5 1/2% --even though such a move had long been expected. A more basic reason for the Dow's strange behavior has nothing to do with the economy at all; the often-approached but never-broken 1,000 mark* has become a psychological barrier. Every time the Dow gets near that level some investors sell, believing that the value of their securities is reaching a peak. Now, 974 has evidently become the point at which the warning signal starts flashing in their minds. Says William Freund, chief economist for the New York Stock Exchange: "There is a sort of folklore about the Dow, and 1,000 is a roadblock in the minds of many people."

Cyclicals Up. To the extent that stock-price movements are indeed telling something about the economy, the story is favorable. The Dow Jones industrial average is composed of only 30 stocks; less-publicized indices measuring the performance of hundreds of issues have hit historic highs in the last few weeks. "Cyclical" stocks--shares in companies whose earnings typically rise and fall with the general economy--are improving. These include stocks of hotels, machine tool, auto and appliance firms. Moreover, the U.S. economy is now growing more rapidly and suffering less swift inflation than the economies of most other industrial nations. Though many Americans seem unaware of that fact, it has not been lost on foreign investors. Net foreign purchases of U.S. stocks during the first six months of 1972 reached an estimated $750 million, exceeding the total for all of 1971.

*During four different trading days in January and February of 1966, the Dow did briefly go over 1,000, but each time it fell back to close below that mark.

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