Chinese Torture in the Stock Market

ON Wall Street, some things are more frightening than panic. One is the sort of Chinese water torture that the stock market has been enduring -- the drip, drip, drip of week-by-week price erosion marked not by tumultuous selling but by an absence of buying. Panics tend to burn themselves out swiftly and to be followed by sharp price rebounds, in which intrepid and farsighted men make fortunes. The gradual withering away of prices is a demoralizing process that can go on indefinitely. The losses to investors in the long run can add up to an even more impressive -- and depressing -- total than would be suffered more quickly in a full-fledged market crash.

Take last week. By the standards of October 1929, or even May 1962, nothing overly dramatic happened. Trading was light to moderately heavy, ranging daily between 6,650,000 and 14,570,000 shares on the New York Stock Exchange. Yet by Thursday afternoon the barometric Dow-Jones industrial average had fallen 33 points to a seven-year low of 685. On Friday, prices rallied briskly enough to send the Dow average up 17 points to 702. The rise stirred some cautious chatter among brokers and analysts that the market might be, in Wall Street's convoluted jargon, "bottoming out."

No News Is Good

Investors have heard such talk many times before in the past 18 months. In that time the Dow-Jones has fallen 283 points, or 29%, and a staggering $250 billion has been erased from the paper value of stocks listed on the New York and American exchanges. In both length and depth, the slide now ranks as the worst since the Depression market of 1937-38. Indeed, before the Friday rally, the drop could have been said to have repealed the entire decade of the Soaring Sixties; on Thursday the Dow average was lower than at the start of 1960.* The Friday rally, to be sure, was more impressive than some others' that have briefly interrupted the long rout; the point rise was the greatest for a single day in two years. Still, some of the jump was attributed to short-covering--that is, buying by traders who had earlier sold borrowed stock in the richly fulfilled hope that the price would drop, and had decided the time had come to take their profits.

Investors seem to have lost any ability to respond to encouraging news of a less technical nature. The cut in downpayment requirements on margin purchases, from 80% to 65%, decreed early this month by the Federal Reserve Board, immediately increased the purchasing power of stock buyers--but it bucked up the market for only a few days. Defense Secretary Melvin Laird's promise last week that no U.S. troops would be involved in ground combat in Viet Nam after June 1971 is the sort of thing that a year ago might have stimulated dovish Wall Street into a month-long rally. Early last week, it could not push prices up for so long as two hours.

What has made stock traders so skittish? As might be expected in a market that has had no single, climactic break, there is no single, overpowering reason. Instead, there are several reasons. Among them:

THE WAR. Contrary to the myth that capitalism feeds on war, Wall Street sees the Indochina conflict as a breeder of inflation, restrictive Government money policies and general economic disruption --and devoutly wishes that it would end soon. The U.S. invasion of Cambodia has deeply shaken investors' hopes that it will, and all the rhetoric of President Nixon and Secretary Laird has so far failed to restore their confidence. Says M.I.T. Economist Paul Samuelson: "If Mr. Nixon were to announce defeat in Viet Nam and cutting of our losses, the market would jump 50 points. People are distrustful of peace with victory and honor in two years' time. They want the peace without victory that they are going to get in two years, but they want it now."

MONEY SCARCITY. The Federal Reserve policy is once again to expand the nation's money supply, after holding the growth to zero through much of 1969. But by now potential investors of all kinds--banks, corporations, individuals --are short of the cash that they might otherwise use to buy stocks. "The whole country is in hock," says Bradbury K. Thurlow, partner in Hopkin Bros. & Co. High interest rates compound the problem. Some of the money that is around is flowing out of the stock market and into bonds, the yields of which are running over 9% for top-grade corporate issues. Alan Shaw, partner in the Manhattan brokerage house of Harris, Upham, offers this derisive comment on President Nixon's recent bullish proclamation that he would buy stocks if he had the money: "If the banks had money they'd buy stocks; if the institutions had money, they'd buy stocks. If anybody had money he'd buy stocks --but nobody's got any money." THE MARKET SLIDE ITSELF. The longer that prices are weak, the less reason investors can see to buy and the more reason to sell in order to get out. Thus, after a certain point, a fall-off becomes self-reinforcing. The current drop seems to have passed that point. By now, some investors have suffered fearful losses, particularly in faded glamour stocks. So far this year, Comsat has dropped from 57 to 30, University Computing from 99 3/8 to 26 and Natomas from 65 1/4 to 23. Even IBM has fallen from 387 early this year to 271.

Brokers find it difficult to recommend issues for those people who still have the guts to buy. Mrs. Joan Abernathy, a portfolio manager with Kidder, Peabody in Boston, complains that with so many stocks falling and so few rising, "we might as well be putting our customers into Czarist bonds." The brokers feel even more frustrated than their clients; men who made $50,000 or more in commissions during the bouncy markets of yesteryear now have a hard time paying their mortgages. "A lot of brokers are confused, pessimistic, stunned," says a Chicago broker. "The younger ones have never experienced anything like this before." Employees in an Atlanta office of Eastman Dillon, Union Securities & Co. put up $20 to buy a punching bag that they could slug to vent their anger. It has been hung over a news ticker, and goes blap-pedy-blappedy-blap all day long.

More important than any of these specific reasons for the market's malaise is a kind of free-floating anxiety that brokers and investors sense but find difficult to describe. Generally, they express it as a feeling that the nation has lost its direction--economically, socially and in foreign policy--and that the Nixon Administration is providing no reasoned leadership to get it back on course. The investment community's loss of confidence in Nixon, whose election initially set off a spurt in stock prices, is remarkable. Says David Basevitz, a Midwest Stock Exchange executive: "The public is bearish on the country."

Uncharted Waters

Part of the anxiety can be traced to a quite justified though eerie feeling that both the stock market and the economy are operating in uncharted waters where the old rules of navigation no longer apply. The current bear market is the first ever in which institutional investors, such as mutual funds, pension funds, insurance companies and trusts, have dominated the trading; they account for 60% of the public volume on the New York Stock Exchange. That is a major reason why today's bear is not acting like any in the past.

In markets dominated by individual investors, declines followed a regular pattern: prices would drop--and then a large number of shareholders panicked and dumped their holdings simultaneously, sending prices plummeting on enormous volume. While such a "selling climax" is an unnerving experience, many Wall Streeters would dearly love to see one again. By cleaning out the last doubters in one swift rout, the old-fashioned climax would usually end a bear market and set the stage for a bouncy rally to new highs.

Institutions, in contrast, have never indulged in panic selling. They have proved perfectly willing to sit on the sidelines for prolonged periods and do little buying. Mutual funds as a group currently hold 8.5% of their assets in cash, and some other institutions hold far more. Some of the go-go mutual funds have been selling off in dribs and drabs, over the past several months, the glamour stocks in which they have taken a beating. In the absence of much sustained buying pressure, their selling has been enough to depress prices persistently. For every stock sale there must be a buyer, of course, but nowadays the buyer is often a specialist assigned by an exchange to keep markets orderly. Part of his obligation is to buy when no one else will. Specialists have had to swallow gigantic quantities of stock on which they have accumulated huge paper losses. They can be expected to disgorge some of their holdings whenever prices start to rise -- a factor that may tend to abort rallies.

Hard Combination

Investors have been rattled by the Government's failure thus far to prevent inflationary recession, and current news has done nothing to soothe their nerves. Last week the Government reported that industrial production in April slid for the eighth time in nine months. Personal income in April would have dropped for the first time in more than four years if the Government had not shelled out unusual lump-sum payments to Social Security recipients and federal workers. The payments were necessary to make a 15% Social Security rise and 6% federal pay boost retroactive to the first of the year. Real gross national product fell at an annual rate of 3% in the first quarter, not 1.6% as first reported; the drop was the largest since late 1960, a recognized recession period. A particular depressant to the stock market: corporate profits have gone down more sharply than Wall Street expected. In the first quarter, pretax profits shrank to an annual rate of $85 billion, more than $10 billion below the record pace of early 1969.

Nixon's advisers tirelessly insist that what they used to call their "game plan"* for gradually deflating the economy is working on schedule. They have some outside support; Economist Milton Friedman last week decried "the hysteria emanating from Wall Street." The President, however, is getting increasingly nervous. With a congressional election coming in six months, the economic situation leaves his party vulnerable to the kind of criticism voiced by Economist John Kenneth Galbraith: "It is very hard to combine inflation with rising unemployment and a stock-market slump, but the Nixon Administration has managed to do it."

Republican Governors who met with Nixon last week told him of growing public unhappiness about the April rise in unemployment to a five-year high of 4.8%. In California, a high-ranking Republican worriedly confides: "The economy is an issue. The guy who is out of a job certainly is not going to blame a Democrat." One of his Democratic opponents adds: "Politically, it is dynamite --and it is not us that it is going to blow up."

The market slide could contribute to the political turmoil by helping to aggravate the business downturn. Economists generally do not consider the market a major determinant of the pace of business, but most concede that, in Paul Samuelson's words, "There is a little wagging of the dog by the tail." A continued stock slump would make it more difficult for corporations to raise money by selling new shares--and that is already extremely difficult. Nixon's economic advisers have tended to ignore the market, but now they are paying a little more attention. They know that retail sales, for example, may be hurt because the stock slide makes people feel poorer.

Saucer Instead of V

A continued market slide would make many Americans not only feel poorer but actually be poorer. It is still fashionable in some quarters to dismiss the market as an exclusive club for the wealthy. In fact, it is the world's least exclusive club. The 26 million Americans who own stock directly constitute one of the nation's largest minorities. Those who have at least an indirect interest in the market, through participation in mutual funds, pension funds and other institutions, number 100 million, or almost half the total U.S. population. The pensions that millions of citizens eventually will receive depend partly on the performance of the stocks in which their funds invest.

No one, of course, really expects the bear market to go on forever. Indeed, such giant mutual funds as Massachusetts Investors Trust and Dreyfus have begun to buy cautiously in the past few days. But there is a considerable body of opinion that the recovery, whenever it begins, will be slow and struggling --"saucer-shaped" rather than "V-shaped," in the argot of the chartists. Some reasons for that expectation: the avowed intention of the Government to permit only a gradual growth of money supply and the likelihood that many individual investors, burned badly for the first time in their lives in the current bear market, will think long and hard about buying stocks again. Jim Fitzgerald, a Los Angeles broker, says that his customers have expressed "sheer disbelief" that the stock market could drop as much as it has, and adds: "Many of the people who are selling now will never want back in again."

That does not mean that the Government should make reviving the stock market the primary aim of its economic policy. Presidential attempts to boost investors' confidence directly usually backfire anyway, as Nixon has lately discovered. But Wall Street's loss of confidence in his leadership is something the President cannot ignore precisely because investors' worries are the worries of most Americans. By focusing attention from a different direction on the need for peace and firm presidential leadership, the market slide could yet prove to be constructive.

* Market averages that include more stocks than the 30 in the Dow index are higher than in 1960--but have dropped even more sharply in the current slide.

* The White House lately has forbidden use of the term, perhaps because it sounds too sporting for a serious business. Some economists crack that the game plan is "punt, pray, and hope for a fumble."

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