The Morning After

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Last week a Federal Reserve study of consumer finances showed that "while many consumers were pessimistic about business conditions, very few expected their own incomes to decline. Nearly three-quarters expected to be making as much or more at the beginning of next year; only one-tenth expected their rate of earnings to decline." Though consumers in 1958 plan to buy fewer houses, heavy appliances and new cars, the survey noted, they will spend more on used cars, furniture and home modernization. Retail sales for the year are 2% ahead of 1957, with a fat 7% increase in department-store sales to start off March.

Stumbling Bull. This calm view of the recession was reflected in normally jittery Wall Street. The bull market had been the first to take fright last year. After hitting a July peak of 522.77 on the Dow-Jones industrial average, only a shadow below the alltime high, the bull started to slip, stumbled to his knees in October, when the average hit 419.79. As a result, shrewd investors have long since discounted the current news.

Aircraft (down 24%), auto (down 18%), oil, railroad, heavy-machine stocks took a bad licking last year as investors switched into defensive issues such as utilities, food, tobacco and finance companies. Yet, when the selling was heaviest, many a coolheaded investor decided that the news was not that bad and started buying again. Since then, the market has seesawed cautiously higher: stocks on the Dow-Jones average ranged between 438 and 451 in January; 436 and 458 in February, closed at 453.04 last week, 33.25 points above the October low.

Today Wall Street is looking to a brighter future. Experts expect that trading will be slow for the rest of the year, that stocks will seesaw in a narrow range. The big test of whether the market has seen its low will come in the next six weeks, when companies release their first-quarter earnings. Railroads, copper and other metals, already hard hit in 1957, are not likely to improve. Nevertheless, Wall Street feels that the basis is being laid for a rise in late 1958 and 1959. One clue is the widening spread between stock dividends and bond yields. In July, when stock prices were high, bonds yielded only .32% less than stocks; today, with stock prices much lower (and bond prices higher), stocks pay up to 1.17% more than bonds, are thus more attractive buys.

No one predicts that the bull will soon jump to his feet and start pawing the ground again. He will first need a heavy feeding of richer sales and earnings. Yet many investors are buying such stocks as U.S. Steel, Montgomery Ward, Libbey-Owens-Ford for the long pull. Says San Francisco Investment Broker George Davis of Davis, Skaggs & Co.: "These stocks are being bought by men with eyes over the hump, while the others are all moaning about 'what a fix we're in.' "

Compass Points. The fix the U.S. is in was primarily caused by the catastrophic drop in auto sales and the extreme cuts by many industries in inventories and production (see chart). Another characteristic of the 1958 recession is that it is spotty and regional.