Wall Street: Foul Weather & Fair Forecasts

The 1966 stock-market decline is hitting more people harder than any in history. At least 21½ million Americans directly own corporate shares; another 100 million indirectly have a stake in the market through their holdings in mutual funds, pension funds, profit-sharing funds and the like. Last week the Dow-Jones industrial average tum bled again, by 30 points to 744, lowest since 1963. So far this year the market has plunged 25%, causing a loss of $120 billion, or an average of $2,000 for every U.S. family. These are euphemistically called paper losses — but in many instances they are very real.

Toll for the Big. The loss is affecting the strategies of big companies. More than 95 mergers have been called off this year, including Consolidated Food and United Artists; Litton Industries and Diebold, Inc.; W. R. Grace and Fanny Farmer. Mergers are usually consummated by stock swaps, and when shares fall, the deal loses its allure. The mutual funds have become so bearish that last week they dumped some stock in large blocs. They were getting rid of electronics stocks and shares of machine-tool companies and others likely to be damaged by repeal of the 7% investment-tax credit. The glamour stocks have dropped much more than the blue chips; Fairchild Camera, Doug las Aircraft, Xerox, Motorola, and oth ers have come down 50% or more from their year’s highs. Such declines have clobbered the executives who exercised stock options with borrowed money, using their shares as collateral, when stocks were high; bankers have been calling many of these men to put up more collateral in the form of cash.

Wall Street’s dominant bears have greatly accelerated their short-selling. They are obviously hedging against any and every dire possibility — higher taxes, tighter money, rougher inflation. Though the U.S. Labor Department reported last week that wholesale prices stayed stable in September for the first time in six months, most economists still expect prices to inflate in the months ahead. The bears predict that earnings after taxes will drop next year.

Pain for the Small. The market’s malaise is paining many small investors. Says a St. Louis spinster: “I’m 60 and announced my retirement last year, when my Rexall stock was 48¾. To day it is 20⅜. Since I can’t get my social security until I’m 62, I had fig ured that my stocks would give me two years of living and enough to buy a small house. That’s how much I’ve lost since last November — two years of living and a small house.”

Consumers so far have not pared their personal spending. Retail chains set sales records in September, though the rises were much lower than earlier this year. Some businessmen in Boston, Denver and Los Angeles have noticed a reluctance to buy luxury goods; but Government economists predict that total consumer purchasing will stay strong because wages are increasing so rapidly.

Despite Wall Street’s bearishness, many small investors remain bullish. Among odd-lot transactions (fewer than 100 shares), purchases recently have exceeded sales by 30% to 40%, but volume has been too meager to prop the market. Though the University of Michigan’s consumer poll shows growing popular pessimism about prices, taxes and tight money, small investors feel confident that the market will climb back before long. They remember that many people who unloaded at the bottom of the 1962 break missed out on the rebound that sent stocks up 43% within 18 months. Says an Atlanta electronics executive: “I’ve lost so much in the market that I can’t afford to get out.”

Buy—When. Many seem interested in buying more—at the right time. Merrill Lynch, Pierce, Fenner & Smith has been getting a record number of queries from investors. Bache & Co.’s investment-training course have been attracting alltime high crowds; one session in Charleston, W. Va., drew 1,000 people. Brokers have large orders to buy —when they believe that the market has gone down as far as it will go.

When will the market touch bottom? Compared to the 1962 market decline, the current drop is not quite so deep (25% v. 27%). Wall Streeters are looking for a strong resistance against further drops to form at about 725 on the Dow-Jones. The bears have easily crashed through earlier resistance levels. Whether or not the 725 line holds will depend in part on third-quarter earnings reports, which will come out in the next few weeks. Even more important in this nervous market will be the decisions—or the lack of them-by the man in the White House.

Lyndon Johnson talks optimistically. Last week he told his press conference: “I think most of the people in this country feel like ’66 has been a very good year. There’s never been a better one. And I believe that ’67 will be equally good.” Yet Wall Street values soft words less than strong actions. Nobody expects the President to raise taxes or reduce the Government’s domestic spending before election. If he does so soon thereafter, his actions would go far to curb inflationary pressures, ease the money squeeze, and reduce the elements of confusion and uncertainty—all of which have been sending the market down.