Descent into Limbo

The stock market is a funhouse mirror of the U.S. economy. It reflects business trends and public expectations in highly exaggerated form, but there is usually enough reality underlying the distortions so that it cannot be ignored. This is especially true now that the market affects the wealth of 100 million Americans, who have at least an indirect stake in stocks through mutual funds, pension funds and insurance policies. For the past three weeks, the market has been projecting a mood of deep nervousness. By last week, eleven straight daily declines had dragged the Dow Jones industrial average down to 836, a fall of about 85 points from early September and near the year's low of 831, posted during the first trading session in January. Prices steadied at week's end, bringing a Friday close of 839.

Overdone but Real. The pessimism seemed as much an overreaction as was the market's record rise the day after President Nixon announced his wage-price freeze. Wall Street's expectations clearly had become unrealistic: a few days ago, for example, Chicago's Wrigley Co. reported a 20% rise in third-quarter profits; its stock promptly dropped 30 points, to 132, because investors had been counting on an even greater earnings increase.

If investors' worries are considerably overdone, however, they are not without foundation. Wall Street justifiably shows more concern than Washington about the Administration's new mercantilism. "We may hang on to the 10% import surcharge longer than we should and touch off a trade war," says Robert Johnson, economist for Paine, Webber, Jackson & Curtis, a big brokerage house. "It could lead to a worldwide recession, and that worries me more than anything." Domestically, adds Richard Johnson, president of Dreyfus-Marine Midland Management Corp., the economy is going through "sort of a limbo period." Analysts are still waiting for the first conclusive signs of the "great year" that Nixon has promised for 1972, and for some concrete idea of the toughness or laxity of the controls that will follow the end of the freeze on Nov. 13.

Prince of Demons. Outside the stock market, uncertainty may not be the prince of demons that it is on Wall Street, but neither is it a force for optimism. Members of TIME'S Board of Economists showed somewhat less cheer at a meeting last week than they had at their last previous gathering in late September. Economists who had predicted an unprecedented $100 billion rise in national production next year stood by their forecasts, but confessed that they felt less sure. Walter Heller and Robert Triffin noted that industrial production is still 6% below its peak in 1969, that orders for durable goods dropped in September, and that the savings rate has stayed high, indicating continued doubts among consumers, whose spending is necessary to produce a sharp rebound in business. Said Economist Joseph Pechman, a member of TIME'S board: "Except for auto sales and residential construction, this economy is still stuck in the mud."

The effect of economic uncertainty upon stock prices has been magnified by doubts about the likely impact of post-freeze controls on business. Many businessmen worry that the controls will hold prices down more than wages, and that profits will suffer as a result. That is the exact reverse of the anxiety expressed by labor leaders, who fear that the controls will restrict wages more than prices, and that profits will soar while workers are hurt.

Avalanche of Issues. Internal ailments are also hurting the stock market, reports TIME Correspondent John Tompkins. Mutual funds are losing rather than gaining investable cash; their sales of new shares to the public have fallen far behind redemptions. Because of the funds' disappointing investing record over the past two years, some salesmen have found it easier to persuade customers to buy insurance policies rather than fund shares. Investors are also shifting to new funds that specialize in bond trading. A final factor in the stock slide has been a rush by corporations to sell new stock. New issues in September alone totaled $1.5 billion, almost four times the volume in September 1970. Richard Jenrette, president of Donaldson, Lufkin and Jenrette, thinks that the stampede reflects mostly the lasting terror of being caught short of money that the Penn Central bankruptcy stirred in corporate treasurers. "A lot of the new financing does not seem necessary," he says. The avalanche of new issues at a time when the Federal Reserve is again holding down the growth of the nation's money supply has simply been more than the market can absorb.

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