The Blue-Chip Boom

Not in years has the stock market had such a wide-swinging week. In one day the Dow-Jones industrial index shot up 7.99 points, the biggest gain since Sept. 5, 1939, after World War II began. Next day prices dropped 7.18 points, the biggest break since March 14, when investors were scared by the Fulbright committee.

The cause of the fireworks was a surprise announcement by General Motors that it was splitting its stock three shares for one, held as of Aug. 8, the fifth stock split* in G.M.'s history. It will give G.M. 278,683,500 shares of stock, more than three times the total for General Electric, which has the second biggest amount of stock outstanding.

The Morning After. The morning after the split was announced, the rush to buy G.M. stock was so great that Stock Exchange officials could not "open" the stock (i.e., match buy and sell orders) for an hour and forty-five minutes. When the stock finally opened, 85,000 shares were traded at 128, up 14 5/8 over the previous close. By the time the market closed, buying was a little less frantic and the stock eased to $127.75. For the day, the increase in the paper value of General Motors stock was $1,335,357,437.

Prices of other high-priced stocks also soared as investors bought in hopes that they would follow G.M.'s lead and split: I.B.M. was up 8 points, to 425; Standard Oil (NJ.) advanced 8 3/4, to 138; Sears, Roebuck climbed 5 points, to 98.25.

But the big rise in the Dow-Jones industrial average gave a false picture of the market. The index, made up of 30 stocks, mostly bluechip, includes G.M. While they were jumping, many other stocks declined. Of the 1,231 issues traded, 636 closed lower, while only 361 advanced (234 were unchanged). The next day, as traders took part of their sizable one-day profits in blue chips, the index had its big drop. Ordinarily, a one-day drop of more than 7 points in the average would shake the market, set off a prolonged selling wave. But this time no one was frightened. By week's end, the market had settled down, and the blue chips staged a small recovery.

Purchase Plan. Why had G.M. decided to split its stock? There were many reasons. Among them: G.M. was anxious to lower the price, thus persuade many more people to become shareholders. Further, when it announced the split, G.M. also revealed a stock-purchase plan for salaried employees. Under the plan, G.M. will contribute 50-c- toward the purchase of company stock for every dollar contributed by each of its 100,000 salaried employees. Thus, G.M. will soon be in the market for its own stock, and the more shares outstanding the simpler it will be to buy it.

Growth Wanted. The week's ups and downs were the latest evidence that the greatest bull market in U.S. history has primarily been a market for blue chips. Since last January, the Dow-Jones industrial index has climbed almost steadily, from 391.89 to 461.18 at week's end. And the sharpest rise has come since the Fulbright hearings ended. High-priced stocks have gained 8% in value, according to Standard & Poor's index, while its index of low-priced stocks has shown a loss of .3%. One big reason is that investment trusts and big institutional buyers have been purchasing blocks of what they consider the safest stocks, and have been tucking them away.

Almost as important has been the attitude of individual investors. They are less interested in dividends than in growth stocks and in profits from lower-taxed capital gains. To most investors the bigger companies appear best able to move ahead with the fast-growing U.S. economy. Thus, they have been concentrating on such giants as Du Pont, selling at about 30 times its earnings (normally, security analysts think a stock is doing well if it sells at ten times its earnings), and I.B.M., a leader in automation, which is selling at almost 40 times earnings. In three months buying for growth has boosted the stocks of chemical companies (exclusive of Du Pont) on Standard & Poor's index up 14% and aluminum companies 32%.

Trouble Ahead? How high will the market go? Last week it was possible to get all shades of opinion on Wall Street. One broker even predicted that the Dow-Jones industrials would hit 1,000. But some brokers lifted warning fingers. Stock prices have been going up so high and so fast that dividend rates have not been keeping pace. Traditionally, brokers start to worry when yields of stocks and bonds get close. They fear that many investors, discouraged by comparatively low stock yields will start shifting from stocks to safer bonds, possibly touching off a major decline in stock prices. Last week yields on industrial stocks were averaging 3.53%, down almost a third of a point in two weeks, while high-grade bond averages were almost steady at 2.96%. But, because so many investors appear to be buying for growth instead of dividends, brokers are beginning to doubt if narrowing yields mean much in the current market. As a further sign of strength, in three out of the last four weeks, bank loans to brokers in New York City for buying on margin have declined. Thus, despite the recent fast rise in the market, the amount of buying on credit has actually declined.

*Anyone who bought one share of G.M. stock, valued at $370, in 1920, and held it, would have had 37 1/2 shares last week valued at $4,800, plus another $2,402 in dividends. The new split would give the holder 112 1/2 shares.

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