The Wildest Week for Stocks

On Wall Street, it's goodbye to fear and hello to foreign investment money

"There are only two emotions in Wall Street: fear and greed. For most of 1977, we had an excess of fear. The last few days, greed has come back with a vengeance." --William M. LeFevre, vice president of Granger & Co., Manhattan brokers

That sardonic explanation is as sound as any for the explosion of optimism that sent the long depressed stock market kiting more than 55 points in six trading days through last Thursday. The wild rally that started April 13 hit a peak of frenzy at the start of last week: on Monday, April 17, as whoops and cries echoed through the New York Stock Exchange and floor traders tossed torn-up paper in the air to celebrate, an unbelievable 63.5 million shares changed hands, and the Dow Jones industrial average spurted almost 15 points. Prices stumbled a bit the next two days, but then the Dow rose again. It hit a high of 815 Thursday and ended Friday at 813. Big Board volume during the week totaled 212.3 million shares, easily eclipsing the previous record of 162 million shares traded in the last week of January 1976. The Big Board ordered Saturday work at member brokerages to clear away the blizzards of paper.

In their stampede to buy before they missed out on potential profit, investors shrugged off news that only a fortnight ago might have sent prices into a spin. Some highly technical midweek moves by the Federal Reserve to drain money out of banks and thus nudge up interest rates depressed stock prices for only a few hours. Traders concentrated instead on cheerier trends, above all a long overdue rebound in the dollar on world markets.

So pervasive was the new optimism that brokers were talking of 100-million-share days if and when the little guy joins the buying rush. Trading was still dominated last week by institutions such as pension funds, mutual funds and insurance companies. Edson B. Gould, 76, an analyst with Anametrics Inc., who has an awesome reputation for calling stock market turns since 1924, predicts a return to the magic 1000 mark on the Dow by early fall.

Who knows? As the rally demonstrates, market psychology can mercurially shift. Since the end of 1976, when the Dow closed at 1004, investors' minds had been dominated by fears of inflation, higher interest rates and possible recession, despondency about the dollar and a widespread feeling that the Carter Administration was floundering in economic policy. By last Feb. 28, the Dow had sunk 26%, to 742, at which point stock prices had discounted all the bad news that could reasonably be expected, plus all that could unreasonably be feared, plus a bit more for good measure.

Institutions that sold some stocks and then stayed out of the market were sitting on hundreds of billions in cash that they had to invest in something, some time. Foreign investors had shied away from U.S. stocks for fear that a further decline in the dollar would wipe away any profits they might make. But by the end of March, the speculative selling that had driven the dollar to unheard-of lows had burned itself out, and the greenback began to steady. So billions poured in last week from Europeans, Arabs, Japanese and other foreigners who believe America is economically strong and socialist-proof. Even the pension funds of British nationalized industries plunged into Wall Street.

In hindsight, brokers agree that almost any sparks might have ignited a rally. Those that did were weak indeed: a report of only a modest increase in the U.S. money supply, which temporarily raised hopes that the Fed would not have to push up interest rates, and a quickly denied rumor that Exxon had struck oil off the New Jersey coast. Nonetheless, once buying started, U.S. institutional investors followed one another like sheep to jump into the market. In Hong Kong, employees of the Sun Hung Kai brokerage firm were roused out of their beds one midnight to come in and handle a flood of orders to buy stocks in New York, where it was 11 a.m. the previous day.

As the rally roared along, investors found more and more reasons to keep it going. March brought exceptionally strong gains in personal income (up 1.2%), industrial production (1.4%), retail sales (1.9%) and housing starts (an annual rate of more than 2 million, or 32% higher than February). Corporate profits are rapidly rising. Standout example: AT&T last week reported a 21% jump in first-quarter earnings, to a record $1.3 billion.

Now that the market is up, brokers are even finding a few good words to say for the Carter Administration. The President, they think, in his speech two weeks ago finally showed determination to fight inflation, and his Administration is at last moving to bolster the dollar. Last week the Treasury announced plans to sell 1.8 million ounces of U.S. gold over the next six months--about $300 million worth at present prices--and thus sop up some excess dollars that have been floating around world markets. On the scale of international finance, that is a negligible amount of money, but stock traders were pleased that Washington is backing its expressions of concern about the dollar with action. The news helped lift the dollar to 2.08 German marks and 226 Japanese yen, v. lows of 1.99 and 218 a few weeks ago. Also, new Federal Reserve Chairman G. William Miller has made a favorable impression on U.S. and foreign investors, who believe he is a stern and sensibly independent inflation fighter.

On the negative side, there has been no basic change in the economy, and inflation is growing worse. Prices rose at a 7.1% annual rate in the first quarter, v. 5.5% for all of 1977. Still, there seems little chance that investor psychology will swing back to the exaggerated gloom of last year. Even a modest further increase in stock prices could help the economy. Overseas, a rising U.S. stock market automatically strengthens the dollar. If West Germans, say, want to acquire American stocks, they must first buy dollars, and these dealings send the dollar up against the deutsche mark. At home, nothing did more than the stock market plunge of 1977 to dampen the spirits of businessmen and consumers. A continued rally now would convince many that the economy is, after all, as the famous Wall Street cliche puts it, fundamentally sound.

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