Wall Street: A Scent in the Air

Washington may fear inflation, but Wall Street loves it—even before it has arrived. Reason: the very threat of inflation often attracts investors afraid that their money will erode elsewhere and tends to give the market that boomy feeling. Though most economists agree that inflation is no serious threat to the economy right now, Wall Streeters believe that they have begun to sniff a hint of it in the air. Every warning about its dangers—such as the current statement by the New York Federal Reserve Bank that the economy “is clearly vulnerable to inflationary pressures”—seems only to strengthen the scent. Last week this “inflation syndrome,” plus some good news about the economy, combined to spur the stock market to its second big advance in as many weeks.

No Top in Sight. The two-week gain was the largest since stocks rebounded, at the end of June, from their spring collapse. On top of the 12.01-point jump the week before, the Dow-Jones industrial average moved up another 10.98 points last week, to close at 918.95— only 20.67 points, or 2.2%, below its alltime high of 939.62 in mid-May. The two-week gain gave investors $11.5 billion in paper profits, brought the market’s recovery to a point where nearly 80% of its May-June losses were erased. The advance was also marked by heavy trading, a good indication that the advance had broad support; last week saw the heaviest one-day trading volume (7,360,000 shares) on the New York Stock Exchange since June 29.

This sturdy performance was backed both by the possibility of more defense spending for Viet Nam and by a growing confidence that the 55-month-old economic expansion will continue. Last week Gardner Ackley, chairman of the President’s Council of Economic Advisers, forecast that the economy will continue expanding through 1966 and said that the top of the current advance is not yet in sight. The Government expects total output of goods and services to rise to $670 billion in 1965 up 6.6% from 1964. U.S. industry seems to share the optimism: the Commerce Department boosted its estimate of this year’s capital spending for plant and equipment by 1½% to $50.9 billion, 13½% above last year’s level.

Bargain Hunters. One result of this mood was a buying rush for bargain-priced shares, notably of such electronics and aerospace companies as Fairchild Hiller, Avnet, SCM and Ampex. Airlines, chemicals and drug issues spurted, many of them faster than leading industrial blue chips. Boeing (up 81 points for the week) reached a new high for the year; so did Lockheed, RCA, General Electric, IBM and Xerox. Small investors were buying strongly, but brokers also noted active trading by institutions.

Partly because of rising buyer interest and partly because bank loans are becoming harder to obtain and the bond market is weak, many firms are planning to float new stock issues in the fall. They have been waiting since spring for the right time to bring their issues to market, feel that the current advance provides the proper opportunity. The market showed signs of profit-taking at week’s end, may yet have some rocky sessions ahead. Many analysts are predicting, nonetheless, that it will soon break through to a new peak. Whatever the fall may bring, the market has exuberantly dissolved its summer doubts.