Wall Street: One Hectic Week

(See Cover) Tens of thousands of Americans crowded into the board rooms of the nation’s 3,400 brokerage offices last week, gathered for a somber performance.

“Well,” sighed one tape watcher in the Beverly Hills office of Ira Haupt & Co.,”now I’ve got 30% less than I had last Friday.” A young Chicago couple stared glumly at their living room wall, where a petit point sampler proclaimed “God Bless Fairchild Camera.” Across the land,15 million investors reluctantly emerged from a dreamland of perpetual capital gains and grimly focused their attention on the citadel of U.S. capitalism at Broad and Wall Streets in lower Manhattan.

There, behind its grey stone walls and Corinthian columns, the New York Stock Exchange was shuddering through its worst week since June, 1950.

In one hectic week, the paper value of the 1,545 stocks listed on the Big Board plunged by $30 billion — which is more than the combined gross national product of Australia, Sweden and Ireland. At week’s end mighty IBM had fallen from its October high of 607 to 398∧ “X” marked the spot on the ticker tape where U.S. Steel was down from last year’s high of 9¼ to 52¼. As wave after selling wave buffeted blue chips and glamour stocks indiscriminately, the Dow-Jones index of 30 key stocks tumbled almost 39 points last week to 611.88, the lowest level since Jan. 4, 1961. Following suit, stocks on the American Exchange and over-the-counter markets plummeted to similar lows.

Not even good news could arrest the drop. Oxford Paper and Sundstrand Corp. (machine tools) proudly posted dividend increases—and the stock of both companies continued to fall. Crown Cork & Seal trumpeted a 25% rise in secondquarter profits; next day, its stock plunged 3 points to a 1962 low of 95∧.

Touching Bottom. Day by day, this is how it went on Wall Street:

MONDAY, May 21: The slowest trading day in ten months. Three stocks fall for every two that rise. Tobacco stocks lead the downswing, and the Dow-Jones industrial index slips 2.11 points.

TUESDAY: Volume of trading increases 60% as prices continue to fall. With nearly 1,000,000 shares changing hands in the last half-hour, 982 issues fall, and only 141 rise. Only significant gainers are the gold mining stocks—an ominous sign that some investors are betting on a devaluation of the dollar. The Dow-Jones index plummets 12.25, its sharpest decline for a single day in 13 months.

WEDNESDAY: Trading is more frenzied.

Volume rises another 50% to 5,450,000 shares, and so many sell orders swamp the ticker that it lags behind for two hours and 28 minutes. A total of 460 stocks sink to new lows for the year. The Dow-Jones index loses another 9.82 points, to 626.52, its lowest in 16 months.

THURSDAY: The market opens strong, and there is brave talk of rally in the air. In the first hour of trading, the Dow-Jones recaptures 5.16. But then the sellers take over. At the close, 442 stocks are at new lows for the year. The Dow-Jones is off 3.96.

FRIDAY: Selling fever rises. As volume climbs to a 14-month high of 6,380,000 shares, the tape runs progressively later, lags 18 minutes behind at the close.

Steels, oils, food processors, retail chains are all hammered. Only 170 stocks rise, while 1,004 fall and 695 strike new lows.

The Dow-Jones loses 10.68.

The Public Impact. The New York Times combined stock average dropped farther in one week than in any week since Nov. 9, 1929. Of course this was no 1929 again—there are too many safeguards around for that—but Wall Street’s news was disquieting nonetheless. Today’s stock market is neither the clubby preserve of the rich nor a Monte Carlo for bet-a-million adventurers: it is a national institution into which one U.S. adult in eight has placed part of his savings. So much has been invested in the market by private pension funds ($17 billion on the New York Stock Exchange alone) and insurance companies ($12 billion) that what happens on Wall Street affects every pocketbook in the land.

In a general way the stock market reflects investors’ money-backed bets—right or wrong—on the future prospects of the U.S. economy. The Commerce Department lists the stock market as a “leading indicator,” whose rises and falls often portend coming turns in the business cycle. Over the years, the market has let out some false cries of wolf, but the record shows that its 20% drop in 1956-57 presaged one recession and the 17% sell-off in 1960 telegraphed another.

And it is an economists’ truism that when its swings are extreme enough, the market affects the economy, spurring a recovery or speeding the onset of a recession.

Where does the market stand now? The consensus of many leading Wall Streeters was expressed last week by Frederick Millett, research partner of highly respected Goodbody & Co.: “The bull market is over; we are in a bear market.”*

The Prime Reason. What puzzled many was why the market should be withering at a time when U.S. business in general is in reasonably healthy shape.

The U.S. economy is certainly better off than it was 18 months ago when the market was confidently rising. Since last Dec. 13, when the Dow-Jones index began to recede from its alltime high of 734.91, many market dopesters have sought to explain the decline in stock prices by matching it against the headlines. January’s momentary decline in the industrial production index was alleged to have sapped investors’ faith in the recovery.

Communist gains in Laos were diverting attention from encouraging first-quarter earnings reports. Investors were being frightened, another explanation went, by the SEC’s investigation of the nation’s securities markets—particularly by the recent public hearings in Washington, which, although temperately conducted, turned up evidence that not even the nation’s most reputable brokerage houses are free of touting.

No such rationalizing explains why the market has been steadily declining for five months, or why it has dropped so precipitously in the past two weeks. Plainly, there has been a significant shift in the basic attitude of U.S. investors. Edmund Tabell, vice president of Manhattan’s Walston & Co., whose crystal ball is one of the clearest on Wall Street, was confident that he knew what had brought about the change. Said he: “The market is selling off because we have been paying too much for stocks as a hedge against inflation.” Market analysts, economists and businessmen of all political persuasions agree that one event made a falling market suddenly plunge deeper and faster: John F. Kennedy’s crackdown on the steelmakers who wanted to raise their prices. Kennedy’s power play drove home to U.S.

investors, as nothing else has, the fact that the momentum of inflation has been stopped—and that the Administration is committed to keep it that way. All the debate about increased foreign competition, about gold outflow, and the narrowing of profit margins that the steel hassle aroused made it clear to the nation that the green years of automatic growth, plump profits and U.S. dominance of world business were at least temporarily ended.

Besides wiping out the inflationary habit of thought that had kept the stock market buoyed up, Kennedy’s victory over Big Steel profoundly undercut the business community’s confidence in the future, provoked widespread fears that the President intended to fasten de facto controls on prices and profits. The intensity of this feeling was reflected this week at the annual meeting of the American Iron and Steel Institute in Manhattan, where Pittsburgh Steel’s President Allison R. Maxwell Jr. bitterly accused Kennedy of heading “toward a form of socialism in which the pretense of private property is retained while, in fact, prices, wages, production and distribution are dictated by bureaucrats.” When Allison finished his speech, the 1,000 assembled steelmen gave him a standing ovation.

The Growth Cult. Market analysts, who rarely agree on anything, not only joined in ascribing the market’s latest downfall to the steel crisis, but were unanimous on another point: over the past few years stock prices have been driven to unrealistic highs by the ordinary investor’s infatuated belief in capital growth. In the single-minded pursuit of growth, declares David L. Babson of Boston’s David L. Babson Management, investors “have been borrowing against the future.’ Echoed Economist John Langum of Chicago’s Business Research Corp.: “The stock market has for some two to three years been discounting not only the future but the Hereafter as well.”

The classic way to gauge a stock’s worth compared to its price is the price-earnings ratio, i.e., its market price in relation to profits per share of the company. In the late 1920s, Al Smith’s good friend John J. Raskob, who then functioned simultaneously as an officer of Du Pont and General Motors, shocked the investment world by allowing that under favorable circumstances a stock might be worth as much as 15 times earnings. (Despite this bullish tenet, Raskob, like the President’s father, Joseph Kennedy, saw the 1929 crash coming; unlike Kennedy, he did not sell short soon enough to make a killing.) Raskob’s 15-times-earnings ratio became an accepted rule of thumb almost immediately, but the unfavorable circumstances of the Depression pressed the ratio down. As late as 1950 there was little to worry about: stocks in the Dow-Jones industrial index were underpriced, selling at a rock-bottom six times earnings.

Then, with the Korean war, a new boom-and-inflation cycle set off the roaring bull markets of the ’50s. The war itself sent the Government on a buying spree, and the cease-fire released a burst of dammed-up consumer demand for cars, houses, appliances. Its confidence bolstered by Dwight Eisenhower’s election, business began to expand. As the economy reached new highs, big wage hikes were followed by still bigger price rises. The real value of the dollar went down by 3∧ every year.

Rising in the Red. In this ebullient atmosphere, a new generation of younger and less sophisticated investors (and investment counselors) flocked into the market. Few of these investors had ever sweated out a serious market tumble.

Most of them bought stocks not to collect dividends but to multiply their capital and thus protect their savings against inflation’s ravages (those who hung on to war savings bonds lost more by the decline of the dollar than they made on interest). The new gamblers thought they were in on a sure thing if they picked and chose correctly. The cold war and Sputnik would force the U.S. Government to spend lavishly on anything even vaguely related to defense; the population was going up, and to serve it the U.S. economy would boom as never before in the new decade that was being alliteratively billed as the “Soaring Sixties.” Operating on these premises, the U.S.

investor bid stock prices up to giddy highs, concentrating particularly on producers of the new scientific wonders—transistors, computers and space-age gear.

At their peaks, such stocks as IBM. Texas Instruments. Xerox and Hewlett-Packard climbed to anywhere from 80 to 120 times earnings. Raskob was a piker. Some companies such as Itek and Farrington became glamour stocks even while they were still operating in the red. And as investors became more and more intoxicated by growth, the inflation in price-earnings ratios spread across the board, from speculative risks to the conservative blue chips. Such companies as General Electric. Johns-Manville and International Paper saw their stock prices rise even though their per share earnings failed to increase—or even declined.

The Crucial Questions. Toward the end of the ’50s came a turning point in the economy: consumer demand began to be satisfied, and industry found itself nagged by excess capacity. This, coupled with mounting competition from the Europeans and Japanese, enforced a new price discipline on U.S. business. In 1957 wholesale prices leveled off. And in 1961 the U.S. enjoyed economic expansion with only a 1% rise in the cost of living.

“How can you have inflation,” asks Partner Armand Erpf of New York’s Carl M.

Loeb, Rhoades & Co., “when there are no shortages and when the whole world has adequate capacity?” Carried away by the paper gains of a decade during which it took real talent to lose money on the market, most small investors failed to consider the consequences of an end to inflation. When the stock market hit its December peak, stocks in the Dow-Jones index (a relatively stable, conservative group) were selling at a precariously high 23 times earnings. As prices rose, dividend yields on common stocks fell from their long-term average of 4.9% to less than 3%—well below the average 4.3% yield on high-grade bonds, which, being less speculative, traditionally pay less income. Only four times in the past 80 years had common stock yields been so low—and each time this happened, stock prices had fallen sharply within 13 months thereafter.

There were other early warning signals: last summer, many of the high-riding glamour stocks went into a tailspin, and by last autumn a few Wall Street professionals anxiously noted that, although the Dow-Jones average was still going up, there were many days when more stocks were falling than rising on the New York Stock Exchange.

The Loaded Gun. As 1962 began, the early warning signals began to be borne out. In January, to help prevent short-term investment funds from fleeing to foreign countries with higher interest rates, the Federal Reserve Board permitted U.S. commercial banks to raise their maximum rates on long-term savings deposits from 3% to 4%. The sharply competitive savings-and-loan associations countered by pushing their own rates as high as 4.8%, and as these figures loomed big in hard-sell bank advertising, many small investors obviously concluded that they could make as much money, and more safely, in savings accounts as in stocks. As the market declined, this became a more powerful appeal. “People invest for growth when the market is going up,” Wall Streeters say, “but when it goes down they invest for yields.” Result: the Dow-Jones index fell 25 points between New Year’s Day and April 1.

Then came the dramatic showdown between the President and U.S. Steel. It is a Wall Street axiom that the market always finds a ready reason for a selling wave—and this time the accepted one is Kennedy’s offensive against steel. Says U.C.L.A. Economist Theodore Andersen: “Kennedy’s criticism of steel triggered the market decline, but the gun had to be loaded—poor yields, better returns elsewhere, the lack of a need of a hedge against price inflation.”

And as the implications of an end of inflation become evident, says Walter Maynard, senior partner of New York’s Shearson, Hammill & Co., “people are suddenly waking up to say, ‘Suppose IBM is paying $3 a year—why should it be selling at 600? What’s wrong with 400? What’s wrong with 200?’ ” Agrees IBM Chairman Thomas Watson Jr.: “The American public is reappraising the value of the general type of common stock. It’s as simple as that.”

The Bigger They Come. Above all, it was the small investor who was doing the reappraising. In the waves of selling that have battered the market in the past fortnight, most of the trading has been in small lots; the savvy professionals have largely stood on the sidelines. (The mutual funds did their big selling some months back, and, despite Wall Street rumors to the contrary, there is no evidence that foreign investors have been dumping much lately.) Typically unwilling to accept defeat, the small investor generally held onto those stocks in which he had already suffered paper losses, but unloaded those issues in which he had turned a profit. The result was that the stocks that had risen the fastest fell the hardest. By last week’s end the list of stocks that had crashed to half or less of their 1961 highs read like a line-up of last year’s most favored growth issues: American Machine & Foundry, American Photocopy, Avnet, Brunswick, Varian, Vendo, Fairchild Camera, Lionel.

The small investor’s new caution sent stalwarts as well as glamour stocks sliding.

Declines of 15% to 20% from their 1962 highs were posted by A.T. & T., Alcoa, Union Carbide, Eastman Kodak, Procter & Gamble, Johns-Manville, Owens-Illinois Glass and Sears, Roebuck. By last week’s end the Dow-Jones industrials were down from December’s high of 23 times earnings to a more sober 18 times earnings.

Was that sober enough? President Kennedy’s chief economic adviser, Walter Heller, says: “No mortal man knows what a proper price-earnings ratio is. That depends on psychology.” But a few of Wall Street’s mortals last week had some fairly firm suggestions. In an era when income tax rates make capital gains (taxable at a maximum of 25%) often more attractive than straight income, John Raskob’s 15 times earnings no longer strikes some market analysts as high enough. Predicts Monte Gordon, research chief at Bache & Co.: “Stocks of the better growth companies will probably be able to command 20 to 25 times earnings. But stocks of companies that move in step with the economy may get down to ten to 15 times earnings, and those without real potential will fall below ten times earnings.” In the Board Rooms. To some market experts, even Gordon’s relatively conservative ratios seemed overoptimistic. Discouraged by his losses in stocks, the small investor is plunking an increasing proportion of his capital into what seems a safer haven: mutual funds. In 1962’s first four months, investors bought a record $1.2 billion worth of fund shares (an increase of 24% from 1961)—and all indications were that this trend was continuing last week. But in general, the men who manage the funds were, at week’s end, showing themselves slow to pump this cash back into the market.

Many powerful institutional buyers of securities some time ago mapped a reduction in their common stock holdings. For the past six months to a year, some insurance companies have been quietly switching money from stocks into bonds, mortgages and other hard investments. The Bank of New York has ordered a 10% cutback in the common stock holdings of each of the pension funds it manages. The pension funds managed by U.S. Trust Co.

have also received “recommendations” to dump some of their common.

If small investors continued anxious to sell while the great financial institutions remain uninterested in heavy buying, stock prices could scarcely help falling even farther. And in the mahogany board rooms of ‘the mutual funds and banks last week, there was growing talk that the right time to buy a stock is when its price-earnings ratio gets down to Raskob’s 15 to 1. Since the earnings of all 30 Dow-Jones industrials were running at an annual rate of $36 in the first quarter of 1962, scrupulous adherence to the 15-to-1 rule, notes Executive Vice President Charles Bliss of the Bank of New York, would mean that the funds and insurance companies would move back into the market heavily only after the Dow-Jones drops another 70 to 540. Adds Bliss: “I wouldn’t be surprised if the Dow-Jones earnings dropped to $33 in the first quarter of next year, and then the index would have to go down to 500 before you started buying.”

Cause or Harbinger? What effect would so great a market decline have on the U.S. economy? One disturbing possibility is that it might prompt widespread cancellation of corporate expansion plans. Asked one top Los Angeles retailer last week: “How can a company sell stock to raise expansion capital when the props are being knocked out from under even the blue chips?” And if the consumer got too worried by the Wall Street headlines, he might begin cutting down his spending.

As of last week, most economists reckoned that public confidence was tough enough to withstand some more buffeting from the market; record levels of personal income, they felt, suggested that most consumers need not rely upon securities for ready cash. As for the possibility that the market plunge might be a harbinger of recession, if not the cause of one, the majority of economists echoed the line taken by President Kennedy last week: the economy is still basically sound, and Wall Street is simply out of step with it. “It’s hard to accept the view that investors in the market are better forecasters than the economists who make it a fulltime business and still don’t always do so well at it,” says the University of Chicago’s Milton Friedman. Pointing to such expansionary factors as the brisk heavy-construction market and rising Government spending, Friedman holds that “there will be no business recession at least until 1963. If the market portends a business decline, then business ought to be turning down now because the market decline started five months ago. But that would make this the shortest recovery period on record.” And in a week when General Motors stock fell two points,

G.M. Chairman, Frederic G. Donner, predicted “an excellent year,” the likelihood of a billion dollar profit for the second time in G.M. history (the other: 1955).

Still, sanguinity among businessmen was by no means universal. Steelmen, who had been battered into line by Jack Kennedy not to raise prices, conceded that they now have cut some. Their industry is producing at only 55% of capacity, and they have revised their output estimates from 110 million tons this year down to 100 million tons. Steel is not the only soft spot in the economy. The Commerce Department said last week that twelve of its 29 “leading indicators” are trending downward.

Hopes & Growls. Concerned as they might be about the future of the economy, millions of Americans for the moment were considerably more concerned about what was going to happen to their stocks.

The majority of market analysts do not see much of an ebullient rise ahead for stocks, but neither do they expect much more of a fall. “We’re near the bottom now,” says Shearson, Hammill’s Maynard.

“The market has been going down for so long that there are a lot of good values around.” William Coburn Jr. of Boston’s W. H. Coburn & Co. was operating on the theory that “the more blues the investors sing, the closer we are to bottoming out.” As of last week, most analysts were forecasting—or at least hoping—that the market will rally somewhere between 585 and 600, then slowly climb back. But it is only half in jest that Wall Streeters warn that when almost all of them agree on something, they are likely to be wrong.

And there were a few notable bearish growls. Walstorrs Tabell, who last August predicted the current selloff, now looks for a slow, two-stage climb back to about 750 on the Dow-Jones index—and then a slump of even greater severity than the present one. Los Angeles Investment Counselor Richard Ney, who once played Greer Carson’s son in Mrs. Miniver and later married her, has been blatantly bearish most of the time since last October.

That stance makes him as popular with his clients now as he was unpopular then.

He predicts that the decline will drag on another two months, probably drifting down to 570 on the Dow-Jones. “I try to discourage investors from buying market leaders as they hit new highs,” he says. “Too often the highs are death rattles. The really sophisticated investors are liquidating at each rally.” Most impressive argument offered by the bears to support their position lay in the hard-won new realism of ordinary investors about growth and the price-earnings ratio. From now on, says Bache’s Gordon, “prices of stocks will not increase unless we can really see proof of growth in earnings.” Only slightly less pessimistically, E. F. Hutton & Co. Partner Robert Stovall warns: “You don’t heal a blast wound with a Band-Aid, and you don’t convince people to put money back into the market right after they have sustained sizable losses.”

*Legend has it that Wall Street’s use of the word “bull” comes from the upward toss that a bull gives his horns before charging ahead, while the use of “bear” to describe a short seller comes from the old saying about “selling a bearskin before the bear is caught.”