Stock Surge: The Bulls Come Running

It was the kind of buying binge that Wall Street had not seen in more than three years. On the first day of trading last week, investors bought a record 32.1 million shares on the New York Stock Exchange and pushed the battered Dow Jones industrial average up a full 26 points--the ninth highest daily rise in history. In four more days of equally furious trading, the Dow rose 37.08 points in all, punching through 700 for the first time in five months to a week's close at 703.69. That was an impressive 22% above the dismal twelve-year low of 577.6 that the Dow reached early in December, and it stirred some hopes that the big bad bear market that began with the oil embargo of October 1973 might at last be over.

A rally, which has swept up a broad range of listed and over-the-counter stocks, has been under way since December. By mid-January, as hundreds of stocks still languished at postwar lows, the mutual funds and other big investors were looking for some excuse to begin buying in earnest. That excuse seemed to come from a federal court in Denver; it reversed a lower court's order that IBM had to pay $259.5 million in antitrust damages to Telex Corp. Says Robert Stovall, director of investment policy at Reynolds Securities Inc.: "This was the first time in a while that any federal institution has come out with a decision that 'big is not bad.' " IBM, which had been down 36% from its 1974 high of 25 3/8, bounced back 254 points to close the week at 188 1/4.

There are many other reasons for a rally. Interest rates are falling--and will continue to drop--because of the new ease in the Federal Reserve's monetary policy and a decline in borrowing by corporations as the recession deepens. With bank certificates of deposit paying only 6 3/4% interest and bond rates going soft, investors are turning back to stocks, which, at today's depressed prices, offer both attractive dividends and prospects for hefty capital gains when the economy finally picks up. Beyond IBM, last week's great gainers were the high-yield or interest-sensitive stocks that usually bounce back first when money rates come down: utilities, savings and loan associations, insurance companies.

Strong Prop. Inflation shows signs of abating. The wholesale price index has dropped 0.5% since November; retail prices are being marked down for a wide range of goods--clothes, appliances, and notably autos (see cover story next page). Because inflation and interest rates are relaxing in several parts of the world, stocks have been rising on the European and Japanese exchanges; in London, where shares recently scraped a 21-year low, values have jumped back by 62% since Jan. 6.

Is a big bull market in the making? A. Gary Shilling, chief economist of White, Weld & Co., notes that "historically, whenever we've had a major recession-- like in 1921, 1937 and 1958 --we've never had a genuine new bull market until all the bad news is out of the way." Last week's big spenders were ignoring several signs that that has not happened yet. The Labor Department reported that industrial productivity declined by 2.7% last year; that is the first decline in manufacturing output per man-hour since the department began keeping such records in 1947. Corporate profits fell by 10% to 25% during last year's fourth quarter, and there will surely be further declines in 1975. Then, too, Treasury borrowing to finance the $34.7 billion federal deficit that the Administration expects this year (see THE NATION) could well cause many stresses and strains on financial markets.

For the moment, the strongest prop under the stock market is the fact that the institutions that were the big buyers last week still have plenty of money; mutual funds have about 15% of their assets in cash. Stovall of Reynolds believes that "people are now more afraid of missing a market than they are of a long recession." If so, there will be many more busy days on the exchanges.

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