Roller-Coaster to Nowhere
Stock market's sag caps a dozen years of declining clout
On many economic fronts, the news was good last week. The cost of living in July rose only at an annual rate of 4.9%, the lowest monthly increase since December; housing starts jumped to an annual rate of more than 2 million, a cool 46% ahead of a year earlier; corporate profits increased 11.4% in the second quarter. But all this was lost on Wall Street, where stock traders continued to fret about everything from interest rates to new tax legislation. The Dow Jones industrial average, the market's most widely watched barometer, dropped 7.62 points last week, to 863.48, its lowest since the first day of trading in January 1976.
An aberration? Hardly. Though economic recovery is continuing, stock prices have been sinking all year; the Dow is now more than 14% lower than it was on New Year's Eve. And the 1977 sag only climaxes a decade of disappointment. Indeed, the stock market, once a great driving force and sensitive indicator of the U.S. economy, has been steadily losing its vigor, and its hold on investors' minds, for most of the past dozen years.
All the way back in January of 1965, the Dow Jones industrials cracked the 900 level for the first time. Since then, the average has been on a roller-coaster ride--dropping as low as 631 in mid-1970, soaring as high as 1052 at the start of 1973. But it has been a ride to nowhere; after all the ups and downs, the average is just about where it was a dozen years ago. Moreover, even those figures badly understate just how dismal the performance has been. Stock prices have been stagnating at best while prices of just about everything else have been soaring, and as a result the purchasing power of money invested in corporate stocks has drastically declined. If the Dow average in each month since January 1965 had been deflated by the rate of increase in consumer prices for that month, it would today be about 443 (see chart). Another way of putting it: 90-c- invested in the Dow stocks 12 1/2 years ago has shrunk, because of inflation and the market's poor performance, to 44-c- today. The Dow is an average of only 30 blue chips, but broader-based averages do not tell any very different story. For example, Standard & Poor's average of 500 stocks, at 97.51, is about the same as it was in mid-1968.
Even the averages, however, do not measure the depth of the market's doldrums. Some other gauges:
Shares of some of the nation's biggest, best-known and most successful companies have done far worse than the averages indicate. The Singer Co. hit a price peak of over $93 a share in 1972; it is now down to around $24. DuPont stock, at about 113, is selling for less than half its price of 261 in 1965. Among glamour issues, Polaroid has nosedived from a high of 149 in 1972 to around 30 now. Most startling of all: General Motors shares peaked out at almost 114 in 1965 and are now down to around 65--even though GM's profits, running more than $1 billion in the second quarter, are twice as high as those of a dozen years ago.
Small investors are leaving the market. The number of Americans who own shares more than tripled, from 8.6 million in 1956 to 30.8 million in 1970--but it dropped by over 5 million in the next five years. The decline is probably continuing. Individuals accounted for only an estimated 23% of the dollar value of shares traded on the New York Stock Exchange last year, just about half the proportion of 15 years earlier. One reason: the little guy often feels unwanted in a market that is now dominated by the trading of institutions, particularly insurance companies, pension funds and trusts.
Equity mutual funds, the darlings of small investors in the Soaring Sixties, have never recovered from the blow they suffered when the market plummeted in the early '70s. Last year equity mutual funds as a group had net redemptions of $2.4 billion--lost purchasing power that the market could have sorely used. In 1976 the number of people who owned mutual fund shares dropped by around 800,000 to fewer than 9 million.
Seats, or memberships, on the New York Stock Exchange are worth less than a tenth of what they were a decade ago. In 1969 one seat sold for $515,000; last week a seat changed hands for $48,000. That is about $8,000 more than the price of a medallion to operate a taxi on the streets outside the exchange. Brokerage houses have been steadily disappearing by failure or merger during the '70s, and brokers' incomes have been reduced (see box following page).
Hardly anything can be seen that might snap the market out of its doldrums soon. The Carter Administration seems unable to inspire any confidence among investors. Stock prices usually rise during a Democratic President's first year in office--partly because a Democratic President usually pushes job-creating ex pansion programs--but the trend under Carter so far has been down, down, down. Possible reason: Carter, while talking like a Democrat during the campaign, has behaved like a Republican after coming to office--and a stingy one at that. His economic policies so far have been marred by ambiguity and uncertainty, two factors that make investors nervous. Also, he has failed to convince the in vestment community that he can bring inflation under control over the long pull.
Worst of all, there is some reason to believe that the market's sag is becoming self-perpetuating. Every month, investors disgusted by the failure of stock prices to rise during a period of soaring inflation sell out and leave the market; that makes prices sink, further discouraging ever more shareholders. Says San Francisco Broker Paul Juliet: "The 25-to-40-year-olds are not in the market any more; they probably have lost money and had a bad experience. I think we are going to have difficulty attracting those people back."
What is so depressing the market? The biggest reason for the long price stagnation is probably psychological. In the mid-'60s, people widely--and wrongly--believed that Keynesian economics had given governments the tools to control inflation and recession and keep business rising constantly. Recalls Arnold Bernhard, president of the Value Line Funds: "In the '60s stocks were bought on the assumption that growth would go on for ever." The economy of the '70s has been dominated by inflation, recession and fears of energy shortages, all adding up to that worst of stock market poisons--uncertainty. Complains David Grove, a member of the TIME Board of Economists: "Businessmen and consumers can't really make rational decisions as easily as they could in the past."
Result: investor psychology these days is dominated by an urge to avoid risk. One striking illustration is the current practice of pension fund managers. In the 1960s performance was their watchword. They sought aggressively to buy stocks that would rise faster than the market averages--but in the '70s many of those shares have fallen as rapidly as they once shot up. So today many fund managers try to spread their investments about equally among the stocks included in popular averages. In other words, their aim is the modest one of doing no worse than the averages.
The market's biggest single enemy in the '70s undoubtedly--though ironically--is inflation. Stocks used to be considered a hedge against inflation, on the rather naive assumption that if prices generally rose, so would prices of shares, but now inflation is almost universally considered bad for the market. One reason: many investors believe that a large part of the rise in corporate profits is an illusory result of inflation. So a dollar of company earnings is no longer worth as much on the price of that company's stock as it used to be. Even in late 1976, the 30 stocks in the Dow Jones industrial average were selling at a price of 10.4 times earnings; the estimated price-earnings ratio for 1977 is less than eight. Avco, Chrysler and Rapid American shares are selling at only about three times earnings.
Inflation also vastly increases investors' desire to avoid risk: people who think they will need every penny to pay rising food, rent and fuel bills will not put their spare cash into an investment, like stocks, that might go down. And inflation gives them an attractive alternative investment by pushing up interest rates. Though interest rates wiggle up and down, they are far higher than in the early 1960s. So floods of investment money are being diverted from the stock market to seek a relatively safe, guaranteed return in bonds and other fixed-interest securities.
Mutual funds that invest entirely in municipal bonds, which have tax-free annual returns averaging about 5.2%, raised $475 million in new money last year. Most of that was probably siphoned out of the stock market by shareholders who either sold their stocks or chose to put their money into bond funds instead. A large university in Illinois that once invested 75% of its portfolio in stocks now keeps 60% in bonds. Even a plain old bank savings account, paying interest of around 5% a year, seems more attractive than stocks to many people. American households added a huge $105 billion to their savings accounts last year; at least some of that might have gone into stock purchases in more bullish times.
There are many other alternative investments--bank certificates of deposit, real estate, antiques--and disappointed investors are trying them all. Some typical stories:
"The stock market can go sit in the corner and wear a dunce cap," says Mary H. Bready, a suburban Baltimore school administrator. For 5 1/2 years she had her money--and trust--in two mutual funds. When she finally took out her cash last May, she got back only three-quarters as much as she had put in, and no dividends. Mrs. Bready, who has now invested in bank certificates of deposit what she managed to salvage, is much happier. "I have the soul of a French peasant," she confesses. "Now that the money is in CDs, it's visible."
Norman Fair, a Westinghouse marketing representative in Pittsburgh, feels much the same way. Six years ago, he put some of his savings into two mortgage investment stocks. One issue declined 50% while the other became almost worthless. Alarmed, Fair sold half of his stock holdings and put the proceeds into tax-free municipal bonds and savings bank bonds. He also bought four acres of woodland property and a hardware store, and on Saturdays he tends the emporium himself.
For ten years California Real Estate Broker Bill Curran dabbled in the market. But three years ago, he decided that his own field offered more investment opportunity. "The value of real estate is not going to drop away from you," he says. He and his wife Dee began trading in single-family houses north of San Francisco. Now they are investing in multifamily dwellings and have already accumulated an estimated $700,000 in housing properties.
George March, a 43-year-old civil engineer, remembers when his Chicago investment club selected a stock to buy by tossing darts at a list of candidates. Last January, anticipating another drop in the market, March sold much of his stock. He set aside a small amount he could afford to lose to play the options market. He lost it, and chalks it up to a learning experience. The rest he is holding partly in Treasury notes, and he is in no hurry to get back into stocks. "We're not looking any more for pie in the sky," says March. "We are looking for solid dividends."
Those former stockholders who can afford it are turning to some esoteric outlets that are not conventionally thought of as investments: gems, rare stamps and coins, furniture, even whisky bottles. Max Martin, an insurance salesman in San Rafael, Calif, got out of the market in 1973 and into diamonds. Says Keith Harmer, vice president of H.R. Harmer Inc., an international stamp auction house: "Starting about five years ago, people began spending big money on stamps $20,000 to $25,000. They'd sell their stocks, but keep their bonds." One handicap to both investments: retailers can place such a high markup on both diamonds and stamps that the buyer has to wait years before the retail price rises enough to overcome the markup.
Studies by Everett Lee, in charge of the investment program at Boston's New England Rare Coin Galleries, show that over the past ten years the average rare coin has appreciated 43.7% a year--far more than the stock averages. Antique dealers find that an increasing number of clients are buying furniture not only for artistic reasons but also as an investment. As a result of heightened demand, the price of good English furniture in some parts of the country has increased about 25% a year during the past four years. Dick Kritsky, a California grocery-store manager, has spurned the stock market in favor of collecting hand-painted whisky bottles sold by Hass Brothers of San Francisco, distillers of Cyrus Noble bourbon. He has assembled 45 bottles, appraised at $4,000; prudently, Kritsky does not open the bottles but keeps them filled with their original bourbon.
Can these investors, and others like them, be lured back into the market? Perhaps, but the process will take years. Doubtless, stock prices will have their upswings in forthcoming years, and those that take the Dow average above the magic 1000 mark may stir some temporary excitement. But the essential condition for a sustained bull market is a long and strong economic advance, during which inflation simmers down well below its present rate of roughly 6%. How to produce that ideal combination is the central unresolved question of modern economics.
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