Wall Street Says: "Show Me"

Though Wall Streeters voted for him in heavy numbers last November, their euphoria over Ronald Reagan was short-lived. Soon after Election Day, the Dow Jones average of 30 industrial stocks pierced 1,000 for the first time in four years. The widely watched indicator was then on a roller-coaster through the next several months, reaching 1,024, its highest close so far this year, on April 27. Slowly at first, but then with increasing momentum, doubts turned into downright disbelief.

Last week, as trading resumed after Labor Day, brokers stood long-faced among the Dow's smoldering ruins: down more than 170 points to 851, the lowest level in 15 months and about where it was a decade ago. The American Exchange, with a high proportion of energy company listings, was hit almost as hard. Its index fell from 375 in May to 331 at the end of last week. But, in response to indications that credit growth is slowing, stocks rallied a bit late in the week. The Dow closed at 873, up nine points for the week.

The highflyers of last spring have lately been almost all in the dumps. Chief among them are energy and defense stocks, hit hard by slumping oil prices and less certain Administration defense commitments. Itek, an optical systems maker that could benefit from the iffy Stealth bomber project, dropped from $42 in May to $21 per share. Other defense issues that were off sharply: General Dynamics, down from $33 to $25; Martin Marietta ($68 to $51); United Technologies ($59 to $44); McDonnell Douglas ($37 to $30); and Raytheon ($49 to $40). Among energy stocks, Cities Service, a strong gainer only a short time earlier as a result of takeover and merger talk, lost $20 per share in three weeks and sank to $46. Marathon, another favorite among oil stocks, skidded from $80 to $62 in four weeks.

Long-term bonds suffered, and badly. Their yields rose with the general level of interest rates, up to 17% for some high-quality corporate offerings. But the record yield levels failed to attract investors, who saw no reason to tie up their money for as long as 40 years of perhaps volatile bond prices and high inflation.

Both stocks and bonds have been depressed in recent months, in part because investors now find more attractive places to put their money. Popular money-market certificates are more certain investments, and they now pay about 17% interest. In the past six months more than $50 billion has flowed into money-market funds.

There was no mystery about the recent selloff. Basically, Wall Street does not believe that Congress will reduce the budget by enough to make up for the huge tax cuts it passed in July. Said H. James Toffey, a managing director of First Boston Corp.: "Wall Street was always scared of tax cuts without commensurate spending cuts." The Administration's budget slashing efforts were nowhere near deep enough to meet its goal of a $42.5 billion federal deficit for fiscal 1982, or to make possible a balanced budget by 1984, as Reagan promised. Because the Government would have to borrow heavily to finance the growing flow of red ink, interest rates would tend to stay high.

To an extent, Wall Street's uneasiness about the size of the deficit has been magnified by its disquiet about some of the colorful philosophers of supply-side economics. Even though their own Donald Regan, the former chairman of Merrill Lynch, is Treasury Secretary and the Wall Street Journal has been the oracle of Reaganomics, the button-down world of money has never totally embraced the people who are putting forth the new policy. Says Francis H. Schott, chief economist for the Equitable Life Assurance Society: "Guys like Economist Art Laffer and Congressman Jack Kemp are O.K. to have around as long as you just take note of what they say and look for the kernel of truth in it. But you don't necessarily do what they prescribe. That's just a prescription for disaster."

The markets have now got into such a deep funk that nothing seems to encourage them. Good news, such as August's modest 3.7% rise on an annual basis for producer prices, is ignored. Bad news, or any signals of uncertainty from the White House, gets a resounding response smothering any attempt at a rally.

The financial community is not even responding to pleas from its own leaders. William Salomon, retired managing partner of Salomon Brothers, urged fellow Wall Streeters in a letter in the Wall Street Journal on Aug. 17 to stop the carnage in the bond market, reaffirm their support for Reagan and "start putting their money where their mouths have been." But it was to no avail; bond prices continued weak.

The market, of course, has not always been terribly accurate in measuring the impact of major changes in economic policy. Michael Evans, president of Evans Economics Inc., in Washington, D.C., recalls that stock prices rose slowly in response to the Kennedy-Johnson tax cuts of 1964, which helped set off five years of sound business growth. A decade ago, the market wholeheartedly endorsed the Nixon wage-price freeze, sending the Dow up by nearly 33 points the day after that program was announced. But the index subsequently declined when it became clear that controls were killing profits and hurting the economy.

What will it take to calm the markets? Says First Boston's Toffey: "Right now both the bond and equity markets have adopted a 'show me' attitude toward the Administration." Adds Irwin Kellner, chief economist for Manufacturers Hanover Trust bank: "Wall Street is from Missouri." Nothing less than specific congressional action to reduce the size of the federal deficit is likely to calm the nervous gnomes of Wall Street.

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