MONEY
Wall Street blues
Nicholas Davenport
What on earth has happened to Wall Street? After the few heady days in August when President Nixon announced his new protectionism and divorce from gold the bull market suddenly collapsed. Today a friend who has just returned from New York tells me that gloom and despondency pervade the Street and outside there is even a feeling of revulsion against equity shares and the whole concept of paper investment. As if the dropouts had infiltrated the brokers' Offices and begun to write obscene Squiggles on the price boards!
The Dow Jones graph of the industrial Price averages pictures the quite extraordinary history of Wall Street since the dark days of May 1970, when the index Plunged to 630. The sensational rise from 630 to 950 took only twelve breathless Months and proclaimed the recovery of business confidence and morale. Then suddenly it dropped 110 points as inflation blew up, the dollar became suspect and the Monetary crisis developed. The Nixon break away from gold and the popular 10 Per cent surcharge on imports lifted the Market to 92g but once again the jittery feeling came back and as I write the index has fallen to 827 and looks as if it is in a downward slide of Alpine proportions.
There are the usual conventional reasons for a. market reaction after the August optimism. The government statistics for September pointed to an economic slowdown for the third month running. The gross national product in the third quarter fell to an annual rate of only 2.8 per cent against a rise of 4.8 per cent in the second quarter. The growth of gross company Profits seems to be coming to a halt. Cheerful estimates of consumer spending have been spread around, as in this country, but no one seems inclined to believe them. Company ' lay-offs ' are too disturbing.
The shutting-down of plaints by the large corporations in the United States has become headline news. The September report that RCA was closing down its entire computer manufacturing division sounded the alarm. Then General Electric closed its Syracuse plant making integrated electronic circuits because it could buy more cheaply from its plants in Taiwan. Last month recorded more lay-offs by such important companies as Caterpillar Tractor, Western Electric (a subsidiary of American Telephone and Telegraph), Bethlehem Steel, Libby-Owens-Ford, US Smelting and Goodrich. The list of shutdowns is still mounting. Then American Standard announced that it would be forced to sell $250 million of assets to reduce its outstanding debt from $450 million to $250 million. Fortune has called attention to the growing indebtedness of American corporations. Their total liabilities in 1961 were only 54 per cent of their resources; in 1970 they were 86 per cent. The magazine suggests that this growing indebtedness will cause many companies to come to the market to raise money and will bring about a complete ' re-orientation' of Wall Street. Gone are the lush days when the investor could expect to.make 16 per cent to 20 per cent on his investments each year. Wagecost inflation has killed the Wall Street mystique. The common man is turning in disgust to bonds. Incidentally, Dr Burns told the Senate that his new committee would work with the moneylenders on a voluntary basis to speed up reductions in rates which most affected the American family, such as mortgage rates and consumer credits. I hope that our own authorities are taking note of these ' socialist' concessions which would so greatly improve their own public image. There are other good reasons for Wall Street pessimism. The market does not like phase 2' of the government's policy of freezing out inflation which comes into effect in two weeks' time. The market has the feeling that President Nixon, like Mr
Wilson, is turning socialist. They suspect that the proposed Price Commission and the Pay Board composed of equal numbers of management, labour and the government, will affect prices and therefore profits far more than wages. Then there is the new committee on interest rates and dividends presided over by Dr Arthur Burns, chairman of the Federal Reserve Board. In giving testimony last week he told the Senate banking and currency committee that his new committee would see that in general "expansion of dividend income would be equitably related to increases in the incomes of wage-earners." Something of the same sort helped to cause the downfall of the Labour government here in 1951.
The mildest opinion on Wall Street regards the 'phase 2' proposals as unworkable. The Price Commission has to make a distinction between 'exorbitant' and 'windfall' profits, but how? Exceptions to the dividend freeze have to be made to enable small companies to raise capital for expansion and Dr Arthur Burns has admitted that the details have not yet been worked out. The whole thing looks as woolly as the controls of our socialist government of 1945-51. But as Dr Burns has requested companies not to raise dividends until the details have been worked out, the market has regarded 'phase 2' as another cause for bearishness.
There is yet another explanation for the Wall Street blues. The small investor has become disenchanted with the mutual funds whose ' go-go ' managers in many cases made such a hash of things. He has therefore been using the great rise in the market from June 1970 to May 1971 to cash in and get out. The result has been a net redemption of mutual fund accounts since last May (excepting only August). In September the public cashed in 4;166 million net. This can have a devastating effect on market prices as the collapse of the IOS showed over a year ago. Much the same thing has been happening in our own market in Throgmorton Street, Some of our unit trusts have also been up against net
redemptions and the average net sales in August were down to £243,000 although there was a pick-up to £2.8 million in September. But whereas we have the purchases of the life and pension funds to support our own equity market — although at the moment they are conspicuous by their absence — in Wall Street they have no such underlying help.
After the Wall Street crash of 1929 the equity holdings of the life funds were limited to 5 per cent and the limit has since been raised to only 15 per cent. The common man's disgust with the mutual funds has been due partly to the unmasking of the IOS scandal, partly to the over-claims made by the advertising of the mutual fund managers. The same revulsion has affected our own unit trusts. But what really upset the American common man was to discover that equity shares were no safe hedge against inflation.
The Wall Street blues are, of course, crying halt to our own bull market. We cannot even, hope to reflate our economy as Mr Heath intends if America turns down and brings on the world trade recession.
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