1000 Revisited?

Inflation rages unchecked, moves toward international monetary reform are stalled (see story following page), Washington is still shaken by scandals--so what is the stock market doing? Going up, of course. In the past six weeks, the Dow Jones industrial average has shot up about 100 points, recovering roughly half of its January-through-August decline. Last week the average got as high as 953 and closed at 947; three times, turnover on the New York Stock Exchange topped 20 million shares a day. The rising prices and volume may have generated enough commission income to enable the brokerage industry to earn a profit in September after eight months of net losses that have caused draconian staff and salary cuts.

The strongest force behind the market recovery was a drop in interest rates from their towering August peak. Some interest rates are still at alltime highs; most banks, for example, continue to charge a record 10% prime rate on business loans, though the Southwest Bank of St. Louis last week went down to 9 3/4%. A number of key rates, however, have backed down substantially; the yield on 90-day Treasury bills fell from a peak of 8.6% on Sept. 10 to 7.3% last week. The drop has stemmed a rush of money out of the stock market into fixed-income securities.

The conviction is growing on Wall Street that 1974 will bring not a recession but only a slowdown in the U.S. economy. Investment managers also consider the stocks of many big corporations undervalued, because the companies were posting record profits even while the prices of their shares were sliding sharply earlier this year. Finally, investors are drawing a kind of perverse cheer from the persistent worldwide shortages of oil, aluminum, plastics and other basic industrial materials. The shortages, they think, will enable the companies that make those materials to keep profits growing right through the expected economic slowdown next year, because demand and prices for their products will stay high.

Indeed, the big buying action on Wall Street these days is in the stocks of sound, old-line companies like Exxon, Bethlehem Steel and Du Pont. Such glamour stocks as Xerox, IBM and Eastman Kodak are still going down, partly because there is no shortage of copiers, computers or cameras. Also, many of the former highflyers pay small dividends or none at all. The standard industrial companies often pay dividends equaling 5% to 6% of the price of their stocks and so are better able to compete against other investments in an era of still lofty interest rates.

The Wall Street mood of the moment is, in the words of the Ivory soap commercial, "Back to basics." It is especially pronounced in the bank trust departments that now dominate trading, acting on behalf of pension funds they administer (individual investors have still not returned to the market, and mutual funds continue to lose power as redemptions of their shares exceed sales). The trust departments, says one analyst, now think it "utterly foolish to invest in highflyers any more, because the risk-reward ratio has become unfavorable. They are rethinking their investment philosophy." Stories are also circulating in the Street that heads of some industrial companies have pressed the banks to switch. The industrialists have supposedly been incensed to see the prices of their own shares languishing, while the money their companies contributed to pension funds was going to inflate the prices of glamour stocks.

The market upturn is obviously extremely vulnerable to any renewed rise in interest rates. If that does not happen, though, many analysts think that the rally could soon carry the Dow Jones industrials above 1000 again. Since that index is composed of 30 stocks of the very old-line companies that are now suddenly fashionable, a jump in the Dow could mask a continued bear market in glamour stocks.

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