Wall Street: One Hectic Week

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Many powerful institutional buyers of securities some time ago mapped a reduction in their common stock holdings. For the past six months to a year, some insurance companies have been quietly switching money from stocks into bonds, mortgages and other hard investments. The Bank of New York has ordered a 10% cutback in the common stock holdings of each of the pension funds it manages. The pension funds managed by U.S. Trust Co.

have also received "recommendations" to dump some of their common.

If small investors continued anxious to sell while the great financial institutions remain uninterested in heavy buying, stock prices could scarcely help falling even farther. And in the mahogany board rooms of 'the mutual funds and banks last week, there was growing talk that the right time to buy a stock is when its price-earnings ratio gets down to Raskob's 15 to 1. Since the earnings of all 30 Dow-Jones industrials were running at an annual rate of $36 in the first quarter of 1962, scrupulous adherence to the 15-to-1 rule, notes Executive Vice President Charles Bliss of the Bank of New York, would mean that the funds and insurance companies would move back into the market heavily only after the Dow-Jones drops another 70 to 540. Adds Bliss: "I wouldn't be surprised if the Dow-Jones earnings dropped to $33 in the first quarter of next year, and then the index would have to go down to 500 before you started buying."

Cause or Harbinger? What effect would so great a market decline have on the U.S. economy? One disturbing possibility is that it might prompt widespread cancellation of corporate expansion plans. Asked one top Los Angeles retailer last week: "How can a company sell stock to raise expansion capital when the props are being knocked out from under even the blue chips?" And if the consumer got too worried by the Wall Street headlines, he might begin cutting down his spending.

As of last week, most economists reckoned that public confidence was tough enough to withstand some more buffeting from the market; record levels of personal income, they felt, suggested that most consumers need not rely upon securities for ready cash. As for the possibility that the market plunge might be a harbinger of recession, if not the cause of one, the majority of economists echoed the line taken by President Kennedy last week: the economy is still basically sound, and Wall Street is simply out of step with it. "It's hard to accept the view that investors in the market are better forecasters than the economists who make it a fulltime business and still don't always do so well at it," says the University of Chicago's Milton Friedman. Pointing to such expansionary factors as the brisk heavy-construction market and rising Government spending, Friedman holds that "there will be no business recession at least until 1963. If the market portends a business decline, then business ought to be turning down now because the market decline started five months ago. But that would make this the shortest recovery period on record." And in a week when General Motors stock fell two points,

G.M. Chairman, Frederic G. Donner, predicted "an excellent year," the likelihood of a billion dollar profit for the second time in G.M. history (the other: 1955).