The Bears Take Over the Stock Market

THE U.S. is in the grip of the longest bear market since World War II. Stocks have dropped almost steadily for 13 months, and in that time the listed shares held by 26 million Americans have been cut by $158 billion. Last week the Dow-Jones industrial average dropped 31 points, to 744, bringing the market to its lowest point since November 1963, just after President Kennedy was assassinated. The decline was democratic. Du Pont scraped a 15-year low. U.S. Steel traded at its 1954 level. Control Data and University Computing, among other recent glamour stocks, lost ten points or more each in a single trading session. The Dow-Jones has gone down 25% since December 1968 and 7% since 1970 began.

Investors were despondent over the slide. The fear of a major business slump pervaded Wall Street like a chill fog. The mood conjured up the grim humor of The Bears of Wall Street Celebrating a Drop in the Market, a 19th century painting by William Holbrook Beard that hangs in the gallery of the New-York Historical Society. In hushed boardrooms, glum customers and brokers no longer spoke about Viet Nam. The topic was the recession and how long it would be before the Administration realized how serious it could become. President Nixon's press-conference avowal last week that no recession is expected came after the market's close (see THE NATION), but it is not likely to change basic investor psychology. Many market professionals were beginning to feel as if they were back in the recession-prone 1950s. They had little money to buy stocks, and saw few reasons for buying them anyway. "Mr. Nixon," said Broker Bradbury K. Thurlow, "has repealed the 1960s."

Rising Costs. Wall Streeters, of course, have usually tended to take extreme views--and they could be overly pessimistic at present. Their mood has been dampened by a recession in their own business; trading volume is down from 1968, bonuses have been cut back or eliminated, and a shortage of capital has forced many firms to merge. There is a maxim on the Street that warns against following the crowd: when everyone agrees on something, the opposite may be true. From the vantage point of lower Manhattan, things may look worse than they really are.

Still, compared with the solid growth of the 1960s, there are plenty of signs that the nation is suffering an inflationary recession. Profits are falling, money is scarce, growth has stalled. The Commerce Department's index of leading economic indicators fell 0.2% in December, the third monthly decline in a row. Industrial production has been dropping since last July. At the same time, rising costs continue to push prices higher. Wholesale prices rose at an 8.4% annual rate last month, the sharpest climb since July; processed foods provided the biggest part of the increase. So far this year, steel prices have been raised on two-thirds of the industry's product mix by amounts ranging from 3% to 6%. U.S. industry's costs are likely to continue rising, partly because labor contracts covering at least 5,000,000 workers will expire this year, the greatest number since 1959. The start of a nationwide railway stoppage, right after the General Electric strike had been settled (see following story), was an indication of what may be in store.

The push of rising costs has produced some shocking earnings reports, which further depressed the stock market. General Motors announced a 14% drop in fourth-quarter earnings last week; the company's profit margins have slipped steadily, from 10.3% in 1965 to 7% in 1969. The automakers put on a relatively cheerful public face, but in private they are horrified by their prospects. Lee lacocca, Ford's North American Automotive Operations president, fears that 1970 might be like 1958, when Detroit expected to market some 7.5 million cars but really sold 4.3 million. "The market for cars has fallen on its ass," says lacocca.

Wall Street had braced itself for fourth-quarter profit declines among the auto, oil, steel and chemical companies, but some businesses that had seemed almost impervious to economic slowdown also reported earnings declines. IBM, for example, showed the first quarterly earnings dip in ten years, causing a pronounced decline in the stock and general disenchantment with other "glamour" shares. Early reports leave little doubt that overall corporate pretax profits dipped from the third quarter to the last quarter of 1969, probably about 1% on a seasonally adjusted basis. Standard & Poor's forecasts a significant decline in the first quarter of 1970, and Chase Manhattan Bank expects the drop to continue through the third quarter.

Economists are reluctant to predict the profit picture for all of 1970, but early estimates call for a drop of between 8% and 10% in pretax profits. President Nixon's budget message assumes that pretax profits this year will be $89 billion, down 5.6% from an estimated $94.3 billion in 1969. The earnings picture seems worst for auto, chemical, sulfur mining, metal fabricating and television manufacturing companies. On the other hand, companies in cosmetics, food, soft drinks, brewing, office equipment and nonferrous metals are believed to have good prospects.

Dollar Famine. Taken together, there is little reason for the market to go up, at least until money becomes easier. There is simply not much money available that can be put into stocks. Last week the U.S. Treasury had to pay 8.25% interest on a new 18-month note, the highest-priced money of its kind since 1859. Tight money has made many companies shy away from the bond market and sell new stock to avoid paying high interest rates. New issues are flooding the market and not selling well. Still, a record high volume of $3.8 billion of additional issues is already scheduled for offering later this year. The total does not include A.T. & T.'s recently announced plan to raise about $3 billion, half of it with stock, over the next five years. Mutual-fund cash reserves are 7% of total assets--a modest sum in a bear market--and margin credit has declined steeply as investors have found that they need their money to meet the rising cost of living.

The high returns available on bonds may well be attracting much money out of the stock market. Long-term bonds yield over three percentage points more than they did during the last two bear markets. At the Federal Reserve Bank in Manhattan, queues of little investors--postmen, clerks, cab drivers --line up to buy U.S. Treasury bills, which are usually bought only by corporations and the very rich. Unlike most bankers and economists, who have urged the Administration on in its tight-money policy, Wall Streeters tend to criticize it. David Jackson, former chairman of the American Stock Exchange, says: "The way this Administration is fighting inflation, we will have a sound dollar but we will have very few of them."

Structural Shifts. At his press conference, President Nixon sounded as if hs was using some "jawboning" to persuade the new chairman of the Federal Reserve Board, Arthur Burns, to loosen money Since the President had submitted a budget surplus for fiscal 1971, he said, "the time is coming when monetary policy can be relaxed." But Administration economists have stressed that any increase in the money supply and decrease in interest rates will be relatively small and gradual. When the Federal Reserve finally does loosen credit, most bankers believe, money will stay relatively expensive for many years because there will be great demands for capital and a limited supply.

There is also considerable opinion on Wall Street that structural shifts are taking place in U.S. society and will change the investment climate. The period of rapid growth in the 1960s may give way to a slower tempo. Paul McCracken, the President's chief economist, has said that even after inflation is controlled, economic growth will amount to about 6% annually. If, as he would expect, prices rise by 2%, real growth will be about 4%--or significantly below the 5% or more of the later 1960s.

President Nixon's State of the Union message amounted to a repudiation of the traditional American belief in limitless resources and a boundless frontier. In outlining his proposed attack on pollution, Nixon advocated planned growth and a more careful allocation of national resources. "The time has come for a new quest," he said, "a quest not for a greater quantity of what we have but for a new quality of life in America." His message reverberated through Wall Street. Tight money and inflation are transitory problems. But the recognition of limited natural resources, a long-term shortage of capital and somewhat slower growth could portend basic, perhaps permanent changes. The long bear market is challenging many of Wall Street's cherished beliefs.

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