Wall Street Merry-Go-Round

A nerve-jangling week spins investors around in circles

Normally, summer on Wall Street brings a rise in the price of stocks and bonds. But this year has been different, leaving brokers and analysts totally befuddled as to whether the stock market might at any minute begin climbing to new highs or slumping to new lows. Last week the rattled and schizoid market seemed to be trying to do both. It was a nerve-testing five days of reversals and price swings that first stirred and then frustrated investor hopes for the market's much anticipated summertime rebound.

For months, market analysts have been insisting that a convincing break on interest rates is all that investors need to begin snapping up stock at the virtual fire-sale prices that have prevailed since last winter. Thus, when easier money from the Federal Reserve allowed big commercial banks to begin cutting their prime lending rate to a flat 15% the previous Friday, brokers came to work on Monday expecting buy orders aplenty. They were not disappointed. By day's end, the widely watched Dow Jones industrial average of 30 of the nation's leading corporations had racked up a 13.51 gain, to 822, its biggest one-day rise since June 23.

But jubilation did not last long. Though interest rates continued to ease fractionally lower, the short-lived rally fizzled, and by Wednesday the Dow industrials had sagged back nearly to their Monday-morning starting point. The U-turn decline of 12.94 marked the steepest drop since Feb. 22. Worse still, by week's end the drooping 30-stock average had declined even further, plunging another 11½ points on Friday to close at 784.34, the lowest since April 1980.

On one point nearly everyone agreed: the chaotic trading and uncertainty were directly traceable to Washington's ongoing failure to slash the runaway federal deficits that triggered crippling interest rates in the first place. Administration officials conceded last week that next year's budget shortfall will be closer to $140 billion than to the $115 billion gap they foresaw just two weeks ago. The Government will have to borrow at least $100 billion in fresh cash during the rest of 1982, and must raise $35 billion of that by the end of September. Says Irwin Kellner, chief economist of Manufacturers Hanover Trust Co. in New York City: "If you want higher interest rates, just wait a few days. They'll come along very soon."

Wall Street's gloomiest forecasters argue that sky-high borrowing costs are literally ruining the business environment for American industry. Says Raymond Dalio of Bridgewater Associates, a Wilton, Conn., economic forecasting firm: "I think we'll see a repeat of the Crash of 1929. The only way we can avoid a further acceleration of failures is to get a substantial break in interest rates accompanied by a sharp increase in economic activity. That has not happened, and that is why I believe we are already in the early stages of a depression." Dalio expects the Dow to drop to around 600 before the end of the year.