Action in the Market

Shaking off warnings from the Federal Reserve--and many a market analyst--investors continued to buy stocks and dump bonds last week in a speculative drive that sent Dow-Jones industrials up 2.15 points to 508.28, within four points of the year's high. While confidence in the nation's overall economic health is a factor in the rise, soaring stock prices have outdistanced foreseeable earnings. A bigger factor is the fear of inflation, which has grown so strong that many investors break previously accepted rules in their race to cover themselves against a possible decline in the value of the dollar.

Wall Street's investors have virtually ignored the traditional inflation hedges--oils and metals (see chart), whose assets are in the ground and whose profits can be expected to keep pace with inflation. Instead, they are bidding for manufacturing firms, whose costs in a serious inflation will probably rise faster than retail prices, offering no protection to profits. So heavy is the buying that many blue chips have been priced almost out of the market. More and more investors are turning to low-priced speculative issues as repositories for their money. Such stocks represent only 6% of the value of all issues listed, but they have accounted for 37.2% of the trading activity on the New York Stock Exchange this year.

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