The Pause

Ever since last autumn's "cardiac break," Wall Street traders have watched the stock market climb and kept their fingers crossed, waiting for the inevitable "correction." Last week, after a month of slowly slipping prices, the inevitable correction came.

The market suffered the sharpest break since President Eisenhower's heart attack last September. The drop was led by the blue chips, which had paced the rise; but almost every issue on the Big Board lost ground. By week's end stocks on the Dow-Jones industrial average lost 23.90 points, to wind up at 472.49, or 48.56 points below the alltime high set in April. The fall set the average back to where it was last November.

The break differed from previous shake-outs in one notable way: trading volume was light, never more than 2,600,000 shares daily, v. a 5,000,000-share day during the September selloff. Instead of a rush to sell, the drop was caused more by a reluctance to buy, notably by the big investment trusts whose purchases had pushed the blue chips so high. But Wall Streeters guessed that the 10% drop in prices, which had put the market in the same position where it had found strong support in the last two big corrections (see chart), had made some of the blue chips inviting again. Investors who had shifted out of blue chips as their rise narrowed the gap between the yield on the stocks v. the yield on bonds, now had good reason to go back into them again.*

What did the market slump mean to the U.S. economy? One effect was to touch off a heated debate about U.S. economic prospects in 1956's second half. At his press conference. Commerce Secretary Sinclair Weeks refused to be ruffled, said that "the market is just one factor to take into consideration."

Across the broad face of the U.S., businessmen were trying to see where the U.S. is headed. Farm-machine sales were down to the point where J. I. Case Co. shut one of its plants. In the troubled U.S. auto industry there was more talk of production cuts. Holding his first annual meeting, in a big tent in Dearborn, Mich., Henry Ford II put production this year at "less than 6,000,000 units." Said Ford: "Production will remain a negative factor at least until the last quarter." Furthermore, he added, "it seems unlikely that the general economy will expand markedly during the remainder of 1956." The frank talk won Automan Ford a cheering vote from the 2,400 shareholders, some of whom had grumbled over the drop in Ford stock from 64 1/2 to 53 1/2. At the close of the meeting, many of them hurried forward to shake Ford's hand. In Wilmington, Del., General Motors President Harlow H. Curtice, who is worried about FRB's tightening of credit (see box), told stockholders that sales were seriously down, but noted that higher production by other G.M. divisions--notably Electro-Motive diesel and Allison aircraft en gines--would take up some of the slack.

Despite the drop in auto sales, there was no lessening of overall buying, since employment (66 million) and paychecks are at a peak. Retail sales are 3% above last year, and Philip M. Talbott, president of the National Retail Dry Goods Association (8,000 department and specialty stores), said that he expects this year's sales to break last year's record.

Actually, just as textiles and farming had to readjust from a wartime to a peacetime economy, so the auto and agricultural equipment industries are going through a rolling readjustment. While it was a blow to auto workers, the readjustment could hardly come at a better time for the U.S. as a whole. Other industries are strong enough to absorb the shock. Construction is running at a record $42 billion annual pace; industrial building is 50% ahead of last year and, with higher prices, home building is expected to equal last year's $16 billion, even though the physical volume of building may slip lower. At the 64th meeting of the Iron & Steel Institute, steelmen reported virtually 100% capacity production thus far, with bright prospects for the rest of 1956. Though vacations and shutdowns for maintenance would probably bring a 10% to 15% dip in steel production during the third quarter, the outlook was for a sharp upsurge in the final quarter to wind up the year with at least 95% of capacity production. While some companies were buying as a hedge against a price rise and possible steel strike this summer, some steelmen insisted that steel was being used almost as fast as it came from the mills.

What all the reports added up to, said Treasury Secretary George M. Humphrey, was that the U.S. is currently "in pretty close balance between inflation and defla tion." His biggest worry about the future was that fickle factor, confidence--whether consumers would keep on spending, or whether recession talk would cause them to cut down. Said Humphrey: "When you have a high degree of confidence, you are on sound ground. The majority of people have more to spend than what they need for food and shelter. How much of it they spend depends on their confidence in the future."

*The yield on stocks on the Dow-Jones industrial average is running at about 4.60%, compared vvith the yield on top-grade industrial bonds of about 3.35%. This 1.25% spread in favor of stocks compares with a much smaller spread of .76% last fall in the pre-cardiac high, a spread of .64% at the peak of the 1946 bull market, and .46% in the 1937 bull market. In 1929, the yield on bonds was 1.50% better than on stocks.

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