Over the Top

For more than 25 years, one statistic has spelled for Wall Streeters the excitement and romance of the Roaring Twenties. The figure was 381.17, the highest closing point reached by the Dow-Jones industrial average in the 1929 bull market. In all the years since, investors hardly expected the market to reach such a peak again--until this year. Last week the big bull market of 1954, which has been surging up for five straight weeks, finally crashed through the 1929 industrial high.

As volume hit 3,000,000 shares or better every day, the floor of the N.Y. Stock Exchange swarmed with traders bidding for stock (see cut). The heavy buying shot up the motors and steels, then spread to the oils, railroads and chemicals. Standard Oil Co. (N.J.) leaped 7 points to 107 5/8; U.S. Steel 3 to 69 5/8; New York Central 1 1/2 points to 25 1/4; Union Carbide 4 1/8 to 84 3/4. By week's end, the Dow-Jones industrial average was up nearly 10 points to 387.79. rounding off a post-election rise of 33.83 points. Since the beginning of the year, the average had risen more than 100 points, or some 35%.

Average Y. Market. What did the new high in the average index mean? Said one Wall Streeter: "The Dow is back to 1929, but I don't know whether the market is." Some of the other indicators showed just what he meant. The Dow-Jones rail average, though at a high for the year (up 2.55 points last week to 132.27), was still almost 60 points below its 1929 peak; the utility average (up a fraction of a point to 60.75) was more than 80 points below its high. Among other standard Wall Street guides, there were similar discrepancies. The New York Times average of 50 representative stocks, at 253.55, was 50 points below the 1929 high, while the Herald Tribune average of 100 stocks, at 175.72 was 33.15 points below its top. On the other hand. Standard & Poor's index of 50 stocks, which had been setting new highs for three years, was 100 points above the old peak of 1929.

There was good reason why the indicators did not jibe. Each uses stocks of its own choosing, dropping them when they become inactive or cease to be representative of an industry, and substituting new ones. Of the 30 stocks that make up the Dow-Jones average today, more than one-third were not on the list in 1929. Among the newcomers are such giants as Du Pont, United Aircraft and A.T. & T. Among those dropped, for varying reasons: American Sugar Refining, Mack Truck, North American Corp. As an example of what such omissions and substitutions can mean statistically, it has been figured that if the inactive stock of International Business Machines, once on the Dow-Jones list, were still included, the industrial average would be over 400.

A further complicating factor in every index is the frequent stock splits, which distort the statistics. If a Dow-Jones stock is split three for one, for example, it is given a statistical weight greater than its former importance. Hence a stock like General Electric, which has been split twelve times since 1929, is relatively more important in the average than one such as General Foods or Woolworth which has had no splits.

Short-Term Indicator. Another big trouble with the Dow-Jones, and most other averages, is that they reflect broad market trends largely in terms of what a few blue chips are doing. Even on the day last week when the Dow-Jones average rose the most, almost half of the 1,271 stocks traded showed losses, and a few, e.g., Bell Aircraft and Studebaker-Packard registered lows for the year. Concluded the Wall Street Journal (which is owned by Dow Jones & Co., Inc.): the meaning of the industrial average "becomes increasingly vague'' except as a short-term indicator of market trends.

That is why Wall Streeters turn to other gauges to determine how high the market really is. Even without allowing for the 50% depreciation of the dollar, almost all indicators show that the market is still low when compared to 1929. One such measure is the dividend yield of stocks, now at 4.85% v. 3.3% in 1929. Compared with the yield of corporate bonds, stocks are in an even stronger position. They pay one-third more than bonds now, v. only two-thirds as much at the market's peak in 1929. Furthermore, there are still many companies whose stocks would be worth more dead than alive, i.e., their liquidation value per share, based on assets, is greater than the market price. Another yardstick: stocks now sell at an average of 13 times their earnings per share v. 21 times in 1929.

Bulls & Bears. No one in Wall Street last week thought that the stock market had become a one-way street. But for the moment, at least, the bulls were roaring. One bullish factor, paradoxically, was supplied by the bears. It was the near record short-interest figure of 3,100,000 shares (the number of shares sold short in anticipation of a market dip). Though much of this represented investors protecting long-term gains, any decline was bound to be cushioned by the shorts buying to cover their sales.

Another item cited by the bulls was the fact that 1954's market boom, unlike 1929's, is not built on a tower of credit. Stock buyers must now put up 50% in cash v. only 10% then, with the result that there is now only $1.5 billion of borrowed money in the market v. more than $8 billion in 1929. And despite the buying surge, new money for investment is being accumulated so fast that cash in brokers' accounts totals a record $1 billion v. only some $250 million in 1929.

Wall Streeters could differ last week over their indices and statistics. But one thing was clear. In its spectacular rise, the stock market reflected the nationwide confidence of investors that the U.S. would continue to prosper.

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