The Bears of War

In the Communist credo, Wall Street provokes war because it is good for business. In the Wall Street credo, war is bad for business and for the stock market. Last week, the credo of Wall Street once more proved true. The fighting in Korea caused the worst week's break in the market in more than a decade.

In the first day's trading after the Korean fighting began, the Dow-Jones industrial average tumbled 10 points (TIME, July 3). Next morning, it looked for a time as if the worst was over. Stocks started recovering at the opening bell and by noon were up as much as three points. Then came the news that President Truman had ordered U.S. intervention in Korea, and a huge wave of selling swamped the market. Big & little traders, amateurs and professionals scrambled to unload.

Chopped Chips. Down went the blue chips. Chrysler fell 3/4 points to 68, A.T. & T. 71 to 148, General Motors 6 5/8 to 85, U.S. Steel 3 points to 31. The Dow-Jones average dropped a frightening 8 points, to 206.33, scaring even those calm investors who had piled up paper profits during the bull market into selling and taking what profit remained.

Suddenly, in midafternoon, a surge of buying began, simply because the stock prices began to look like bargains. By day's end the market had recovered almost all of its losses. Far into the night clerks totted up the day's transactions of 4,860,000 shares, the greatest since Sept. 5, 1939. The number of individual issues traded (1,260 out of nearly 1,500 listed) broke all records. The market kept rising the next day, but it was still so nervous that any wisp of news set it churning. On Thursday a new wave of selling started, and by day's end the industrial average was down another 7.96 points to 206.72.

But next day, the big investment trusts began to buy. The market climbed to 209.08, and some traders thought the war hysteria had finally spent its force. At the start of this week, trading was light. Down some 19 points from the bull market high, the market had lost in one week all the progress it had made in five months. An estimated $8 billion in paper values had been wiped out.

Scared Bulls. The market had cracked because investors well knew that business, under wartime excess-profits taxes, could not maintain its current peacetime profits. For example, General Motors, which is earning at the rate of $20 a share this year, earned a maximum of only $3.68 during World War II. Studebaker, earning at the rate of $12 a share, had a wartime peak of $1.74. U.S. Steel, now earning at the rate of $6.56, earned only $5.29 in its best World War II year. The facts were that the blue-chip companies whose stocks had led the bull market's rise, stood to make much less during a war. And in a new war, excess-profits taxes, renegotiation and tight controls might even squeeze down the profits of marginal and inefficient companies, war babies and the plane companies, which stand the best chance to profit in a war.

The market had risen steadily for a year and, traditionally, such a rise usually has a reaction that knocks the industrial average down as much as one-third of the gain. This was just about what last week's loss amounted to. Thus, barring too much bad news, many traders thought that the market would now find a firm footing around the current level. But whether it would start up again depended less upon earnings and economic facts than upon the psychological building up of confidence again in the bull market.

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