STATE OF BUSINESS: Out of Pattern

Month ago, in mid-July, the stock-market started to go through the roof. Topped off by four million-share days, the Dow-Jones average hopped ten points (to 144.71) from July n to July 21. It seemed almost within reach of its 1939 high (154-85) and its 1938 high (158.41). Last week stock which was sold at the July peak could be bought back for ten points less. Those who profited by this turn of events were chiefly professional traders. SEC has since reported that at the peak, in the last half of July, while the public was buying heavily, Exchange members did 78% of all short selling. Last week the public thought that the professionals were lucky in finding Mr. Hitler working for them at Danzig.

War Market? There were indications that Nazi deviltry was not wholly responsible for last week’s bearish market. Stocks rarely go up when falling commodity prices reflect business unwillingness to bid for materials for future use. This unwillingness was already apparent by July 22 when the Department of Labor’s wholesale price index fell sharply on its way to a new post-Depression low (74.8% of 1926), again in early August when both the Dow-Jones Index of future commodity prices and Moody’s index of spot commodity prices slumped sharply.

Last week provided additional evidence that the Polish crisis was just one of several factors depressing stock prices. War markets have a normal pattern: ordinarily, a war scare forces stock prices down (because businessmen want cash) .and commodity prices up (because Governments and corporations want essential supplies). London markets ran true to form last week; most commodities rose because of speculative war stocking (including heavy copper and rubber buying by Germany). Instead of following the pattern, U. S. commodity prices marched downhill like stocks (the Bureau of Labor Index remained at its low; Dow-Jones and Moody commodity indices each fell over a point). Something besides war fear was obviously at work.

Production. The Federal Reserve Board last week released its production index for July: 102, up from 98 for June. This rise (which represented not an increase in production but the fact that most business did not decline as usual in July—for the index is seasonally adjusted) reflected in part unusually early machinery, parts and materials production for the 1940 auto models (on show already).

This cheerful sign could not account for the shakiness of stock prices unless July’s rate of production already anticipated fall business. Last week General Motors’ Alfred P. Sloan Jr. and Chrysler’s K. T. Keller (see p. 54) told business something closely approaching this. Said Sloan: “Automobile sales will be fully as good as last year.” Said Keller: “The immediate prospect seems to be that business will continue at current levels, or possibly show some improvement ” A generous estimate of “some improvement” might put the Federal Reserve index at a fall peak of between 105 and no, to a fourth-quarter average perhaps 5% above 1938’s 101 (average).

If this comes true, the production index can look forward to a rise of only three to seven points compared to a 20-point rise from July to November last year.