Wall Street: The Reasons Why

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It wasn't a Black Monday on Wall Street, but it was dark grey.

On the first day of trading last week, the Dow-Jones industrial average went down by 16.32 points—the most precipitate plunge since the day of John F. Kennedy's assassination. Throughout the rest of the week, the market tried bravely to rally, failed, and ended up at a Dow-Jones average of 847.38, a new low for the year, and down 148 points, or 15%, from Feb. 9's peak of 995.15. The Big Board's new flattened-out index (TIME, July 22) slipped one point to 45.29, or 2%. The Dow-Jones rail average also hit a 1966 low of 220.26, a fact that immediately led some pessimists to recall a Wall Street adage to the effect that when industrials and rails establish new lows in tandem, it is a sure sign of a bear market.

Actually, what had happened to the market? There were as many answers as questions about that. The U.S. economy was still strong, as evidenced by second-quarter earnings reports (see following story). The fact is that, no matter how successful Lyndon Johnson may be politically, an increasing number of investors distrust his Administration's fiscal policies. Despite inflation and the rising cost of the war in Viet Nam, the Administration refuses to cut Great Society benefits; instead there is continuing talk about rescinding the law that now allows U.S. corporations to claim a 7% tax rebate on outlays for expansion.

Stock investors are therefore nervous —as witness the fact that even the mutual funds were staying relatively clear of Wall Street. According to second-quarter reports, the mutuals have some $2.3 billion waiting to be invested. This represents about 61% of their assets in cash and marketable securities, the highest ratio since 1962.

Last week came an example of why some people are sensitive about Government fiscal policy. The Treasury Department announced that, in order to refinance part of the national debt ($320 billion), it was now offering to the public $8 billion worth of notes. In view of the tight money market, the notes carry a 51% interest rate, the highest since 1921. This might seem attractive to a lot of U.S. citizens—but, as U.S. taxpayers, they will eventually be footing the bill for the higher interest.