Psychosis or Lag?

Wall Street's bear market reached such a pass that a Cabinet member asked the President if he had considered putting a floor under stock prices. The President just laughed. But it was no joke to U.S. investors, who have seen the averages sink for 31 months. Last week a flickering Wall Street rally set off another wave of conjecture on one of the biggest financial enigmas of the war: the divergence of U.S. and British stockmarket prices (see chart).

Ever since mid-1940, British stocks have been pushing upwards. Total rise since October 1940: about 25%, v. a 40% decline for the Dow-Jones industrial average. Yields on British stocks are now under 4% v. nearly 8% for U.S. stocks.

For the spectacular British performance, there are a number of sense-making reasons:

1) The forced sale of British holdings of U.S. securities depressed the U.S. market, but added value to the London market because--combined with various other British measures to keep capital at home--it sharply limited the supply of investments.

2) Until Britain fixed the pound's value at just over $4, capital was driven into common stocks by the depreciation of sterling, as well as other evidences and fears of inflation.

3) All-out production put a floor under stock values: though earnings were sharply limited, they were not subjected to normal seasonal or cyclical risks and held at steady levels.

Such facts help explain Britain's bull market, but throw little light on the U.S.'s bear market. Britain has been subjected to at least as much bad war news and as stringent war controls as has the U.S.--though the British tax system (no capital-gains tax, etc.) is less inimical to stockholders than the American. Many dopesters have given up rationalizing the divergence, assign it to a basic difference in the two nations' war psychoses. Britain, they say, profoundly believes that the war is being fought to preserve its economic institutions; the U.S. as profoundly believes that the post-war world is bound to be an economic mess.

But others have a less depressing explanation: that the progress of World War II has been marked by a two-year lag between U.S. and British experience. London hit its market low in the summer of 1940, after the collapse of France. Thereafter its war production drive became singleminded, Throgmorton Street became practically impervious to bad news (including the fall of Singapore), and the market reacted mainly to the compulsion of too much money and too few goods. The U.S. had its Dunkirk at Pearl Harbor, only five months ago, and the same forces are only now beginning to be severely felt.

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