The Mystery Dive

A wasteful war had just been declared at an end, the economy was going like gangbusters on double time, Government-imposed controls on prices and wages had recently been loosened, and the world's monetary powers were meeting to discuss long-overdue currency reforms. So last week was the perfect time for a good, old-fashioned Wall Street rocket launching, right? Wrong.

The stock market, which for years has been crowded with heavy breathers at the merest wisp of a peace rumor, inscrutably chose the session immediately following President Nixon's cease-fire announcement to stage a flounder. The Dow Jones industrial average, the most closely watched barometer, fell 14 points, its largest decline in 18 months. On Friday, the Dow closed at 1,004, off 23 points for the week and down 48 points from its high so far in what was supposed to be a banner year.

Open Fear. What caused the nosedive? For one thing, investors were not quite so sanguine as some of the professional forecasters about the nation's economic welfare. Many investors suspected that the new freedom of Phase III would end up in a new round of inflation. Lee Silberman, a vice president at Shearson, Hammill & Co., somberly says: "I think the public does not believe Phase III will work."

Another open fear was that commercial interest rates were due to rise a notch; big banks were said to be considering a jump in the prime rate from 6% to 6 1/4% this week. Such a move seemed to be in the offing for at least two reasons. The Federal Reserve Board has shown signs of squeezing the nation's money supply in an effort to control inflation from the top, thus driving up the cost of borrowing. In addition, investors feared that last year's higher-than-ex-pected trade deficit of $6.4 billion might encourage the Fed to allow interest rates to rise in order to keep dollars from flowing abroad.

Finally, some Wall Street insiders were convinced that the slide was caused in part because some big institutional shareholders succeeded in outsmarting themselves. Traditionally, small investors contribute a disproportionate amount of the buying euphoria that accompanies good news. Counting on such buyers to be out in their usual numbers on the long-awaited peace day, mutual funds, banks and pension groups got rid of huge quantities of stocks that were ripe for unloading. But the small investors, who have not yet recovered from their beating in the late '60s and dislike Wall Street's high commission rates more than ever, failed to appear. Says Marvin P. Brown, vice president of Heine, Fishbein & Co. stockbrokers: "There is always some story to explain a stock decline, but the real cause at present is the absence of the public."

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