Valley of Despair

Valley of Despire

For seven days in May, a price rally raised hopes that the stock market might finally be pulling out of its five-month slide. But that was two weeks ago, and last week the drop resumed.

Sour suspicions about Watergate, the continued weakness of the dollar, the soaring price of gold--up to a record $118.75 an ounce in London--and the continued rise of inflation and interest rates combined to hammer the Dow Jones industrial average down 37 points, to 894. After a brief moment of sunshine, Wall Street again became a valley of despair.

Securities men are worried not only about stock prices but also about their own survival. Trading volume is running nearly 10% behind last year's rate on the New York Stock Exchange, and a chilling 40% below 1972 on the American Exchange. The 549 member firms of the N.Y.S.E. collectively lost $75 million in this year's first quarter. Some 67 sizable brokerages are under surveillance by the N.Y.S.E. or Amex because their capital is running dangerously low; last week Weis Securities, a big Manhattan investment house, was put into the hands of a liquidating trustee. Says Broker Bradbury K. Thurlow: "I can't see why anyone in his right mind would keep money in this business."

The root cause of all this trouble is that individual investors are vanishing from Wall Street, leaving more than 70% of the stock trading to be done by institutions such as banks and pension funds. Last year, the number of stock owners in the U.S. declined for the first time since the N.Y.S.E. began counting in 1952, and holders of mutual-fund shares sold more than they bought for the first time since record keeping began in 1941. Odd-lotters, who trade fewer than 100 shares at a clip, withdrew a whopping $2.3 billion from the stock market last year.

Favored Hedge. Individual investors suspect that they have been neglected by brokers who are anxious to woo the big-block trades of the institutions. Individuals pay higher commissions than the institutions do, and many feel that they get inferior research service from brokers. Some also fear that the institutions profit from inside information not available to the small investor. The Equity Funding scandal this spring did nothing to allay that suspicion; some institutions got rid of their stock before news broke that an insurance subsidiary of Equity Funding had been falsifying its books.

Feeling unwanted in the stock market, individual investors have found plenty of other places to put their money. Since 1970, savings institutions have accumulated $180 billion in new deposits, some of it at the expense of Wall Street. Closed-end bond funds, which promise steady returns of up to 7.5%, attracted $1.2 billion in new money last year. Speculators who want fast action are setting one trading record after another in corn, soybeans and other commodities.

Wealthier individuals are putting their money into tangible property like jewelry, paintings and vacation homes, which rarely decline in value. In fact, such objects are replacing stocks as a favored hedge against inflation. The myth that inflation is good for the stock market has been thoroughly exploded: a comparison of high-inflation years like 1947, 1951 and 1969 with low-inflation years like 1958, 1961 and 1967 indicates that stock prices rise much faster when other prices are relatively stable. Two reasons: inflation-swollen costs eventually tend to limit corporate profits, and every inflation raises the threat of a recession brought on by Government action to cool off the economy.

With individuals out of the market, N.Y.S.E. volume has never reached the 20 million-share daily average that brokerages had geared themselves to handle. And with institutions dominating trading, volume and prices have begun to swing wildly; recently the Dow Jones average leaped 29 points in a single day and then tumbled 17 points only five trading days later. Reason:

institutions generally single out a few stocks--including IBM, Xerox, Polaroid and ITT--for the big play. "This is an airshaft market," complains Shearson Hammill Vice President Lee Silberman. "A hundred or so blue chips move up and down while other stocks languish."

Securities men are divided on how the industry can be revived. New York Stock Exchange officials are considering commission-rate increases; that might bolster brokers' incomes temporarily, but it seems a dubious way to win back customers. Many brokers would like the Nixon Administration to rescind its "voluntary" 4% guideline on dividend increases, so that common stocks can compete more effectively with bonds and other fixed-income securities. To win back investors who have turned to commodities for fast action, the American Exchange is considering a plan to allow trading in options, which are agreements to buy or sell a stock at a specified price and date. Merrill Lynch Chairman Donald Regan has suggested that regulations may be needed to require institutions to break up their block trades into smaller pieces spread out over a number of days to minimize volatility.

What Wall Streeters would like most is a sustained, resolute upswing in prices. In the past, a roaring bull market has never failed to bring back disaffected investors. But that raises a chicken-and-egg question: Can the big price rally needed to bring individual investors back occur if they do not come back to begin with?

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