Rally Round the Fed

The stock market had closed, and the streets of Manhattan's financial district were rain-soaked and half-deserted when word came of the Federal Reserve's decision to reduce its discount rate. Wall Street was caught completely by surprise, but it acted fast. West Coast markets were still open, and they were swamped with orders to buy. Stocks rose sharply on the Pacific Coast Stock Exchange, giving the San Francisco branch its busiest hour in 25 years.

Next morning the rush to buy on the New York Stock Exchange was so great that 1,270,000 shares were traded in the first hour, the heaviest one-hour volume since May 15, 1940, the day after Holland fell to the Germans. Just as prices began to ease, the Air Force announced a 50% rise in missile spending for fiscal 1959, and the market took off again. Led by air-crafts, it advanced steadily in all groups, ended the day at 439.35 on the Dow-Jones industrial average, up 11.41 points for a $4.2 billion gain in the market value of all stocks. It was the market's second best day of the year, topped only by the spectacular Oct. 23 rise of 17.34 points.

Clean Sweep. The market rally in stocks was nothing to what happened to bonds. With ever-increasing interest rates, the market has been slow, since buyers have held off and waited for even better buys. But with the discount rate cut, orders poured in to Wall Street from all over the U.S.. particularly from institutional investors, and the bond market had its biggest rally since World War II. Many bond dealers were completely cleaned out. Most notable was a slow-selling $250 million offering of American Telephone & Telegraph Co. When the Fed's news broke, less than half of the A.T. & T. issue had been sold; a half hour later, the issue was sold--and oversubscribed. Dozens of other slow-moving issues disappeared completely into investment portfolios during the bond market's hectic day. The rush to buy became so great that some underwriting syndicates were forced to ration their bonds by confining allotments to members.

The recovery in bonds was also significant for the stock market. With bond prices depressed, bond yields for the past year have been running at the highest levels since the Depression days of the 1930s, and consequently closer to stock yields. (Last week the average yield on high-grade corporate bonds was 4.8% v. 5.9% for the Dow-Jones industrials.) Since stocks are inherently more risky, many investors switched to bonds or did not invest at all. But bond dealers now think that the Fed's action has established a firm bottom for the bond market, and that bond prices will edge up, widening the spread between stock and bond yields.

Where Is Bottom? Whether or not the Fed's action meant that the stock market had also hit bottom when it closed off at 419.79 on Oct. 22 was any expert's guess. Wall Street was still filled with bears who considered the stock rally only temporary, to be followed by a further decline to 400 or 380 on the Dow-Jones average. They talked of "technical factors," deterioration in investor confidence, and a downturn in business, disregarded plans for bigger defense spending and the chances of an unbalanced budget next year (see NATIONAL AFFAIRS). Just as it took a long time for the market's optimism to turn to pessimism, say the bears, so it will take time--perhaps six months or a year--for the market to switch back again.

On the other hand, many market experts realize that the same psychological whimsy that has sent the market into a slump can halt its decline at the least sign of brightening economic weather. At week's end, Wall Street kept an anxious eye on the business barometers. Said Walston & Co.'s Edmund W. Tabell, one of the Street's top market analysts: "If Christmas sales and automobile sales pick up, 420 will be the bear market low."

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