Wall Street: One Hectic Week

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And as the implications of an end of inflation become evident, says Walter Maynard, senior partner of New York's Shearson, Hammill & Co., "people are suddenly waking up to say, 'Suppose IBM is paying $3 a year—why should it be selling at 600? What's wrong with 400? What's wrong with 200?' " Agrees IBM Chairman Thomas Watson Jr.: "The American public is reappraising the value of the general type of common stock. It's as simple as that."

The Bigger They Come. Above all, it was the small investor who was doing the reappraising. In the waves of selling that have battered the market in the past fortnight, most of the trading has been in small lots; the savvy professionals have largely stood on the sidelines. (The mutual funds did their big selling some months back, and, despite Wall Street rumors to the contrary, there is no evidence that foreign investors have been dumping much lately.) Typically unwilling to accept defeat, the small investor generally held onto those stocks in which he had already suffered paper losses, but unloaded those issues in which he had turned a profit. The result was that the stocks that had risen the fastest fell the hardest. By last week's end the list of stocks that had crashed to half or less of their 1961 highs read like a line-up of last year's most favored growth issues: American Machine & Foundry, American Photocopy, Avnet, Brunswick, Varian, Vendo, Fairchild Camera, Lionel.

The small investor's new caution sent stalwarts as well as glamour stocks sliding.

Declines of 15% to 20% from their 1962 highs were posted by A.T. & T., Alcoa, Union Carbide, Eastman Kodak, Procter & Gamble, Johns-Manville, Owens-Illinois Glass and Sears, Roebuck. By last week's end the Dow-Jones industrials were down from December's high of 23 times earnings to a more sober 18 times earnings.

Was that sober enough? President Kennedy's chief economic adviser, Walter Heller, says: "No mortal man knows what a proper price-earnings ratio is. That depends on psychology." But a few of Wall Street's mortals last week had some fairly firm suggestions. In an era when income tax rates make capital gains (taxable at a maximum of 25%) often more attractive than straight income, John Raskob's 15 times earnings no longer strikes some market analysts as high enough. Predicts Monte Gordon, research chief at Bache & Co.: "Stocks of the better growth companies will probably be able to command 20 to 25 times earnings. But stocks of companies that move in step with the economy may get down to ten to 15 times earnings, and those without real potential will fall below ten times earnings." In the Board Rooms. To some market experts, even Gordon's relatively conservative ratios seemed overoptimistic. Discouraged by his losses in stocks, the small investor is plunking an increasing proportion of his capital into what seems a safer haven: mutual funds. In 1962's first four months, investors bought a record $1.2 billion worth of fund shares (an increase of 24% from 1961)—and all indications were that this trend was continuing last week. But in general, the men who manage the funds were, at week's end, showing themselves slow to pump this cash back into the market.