Wall Street: Bad News Is No News

Listless and almost lifeless at times, the stock market in 1977 suffered through one of its worst years. Last New Year's Eve, the Dow Jones average of 30 industrial stocks closed at 1004, its year-end record. By the final bell last week, the widely watched indicator had dropped 19%, to 815. The mood on Wall Street, among the brokers and traders whose heartbeat is the daily ticker, has turned from despair to anger. Says Peter L. Bernstein, an economist-consultant to large institutional investors: "We hate stocks, we hate ourselves and our customers hate us."

The hate comes from a sense of injury as brokers contrast the current blah market with stocks in the Soaring Sixties. Then issues selling at 50, 60 and even 100 times earnings were not uncommon. Now many are going for ultralow prices of six, seven or eight times earnings. Bernstein, writing in November's Institutional Investor, a trade magazine, goes on to say that the experience of investors during the past decade "has probably been the worst in this century --and perhaps the worst in stock market history." Worse than the 1930s? Yes, says Bernstein, when inflation is cranked in. Ninety cents invested in Dow Jones blue chips a dozen years ago is worth only 440 now, a 50% depreciation. Two-thirds of new issues brought to market in the past four years are selling below their offering prices. Shares in Colorado-based brewer Adolph Coors Co. were offered two years ago at $31 each. They now sell for $14, although Coors profits have nearly doubled.

Paradoxically, all this is happening against a backdrop of a generally healthy U.S. economy and a continuing rise in corporate profits and dividends. So depressed is Wall Street's mood that news reports--of, say, a sharp rise in a company's profits--that would have pushed a stock up sharply a few years ago now cause only a brief flurry of a point or two. On the other hand, bad news is no news at all. Hardly anyone paid attention in October when the Dow Jones transportation average sank to a point that indicated to followers of the venerable Dow Theory that a full-fledged "primary bear market" was under way. Everyone already knew that.

Why are stocks so depressed? Analysts asked for reasons can come up with an endless list of quickie "explanations" for any particular day's drop: a jump in wholesale prices, a rise in the trade deficit, a threat of higher interest rates that would pull money from stocks into bonds. Last week, when the Dow fell 8 points, the favored reason was worry over a continuing drop in the value of the dollar on foreign money markets. All these factors do indeed have some influence, as does the perception by investors that the Carter Administration does not have a grip on the complexities of directing the U.S. economy. But the basic reason for the market's malaise is that in a time of continuing, persistent inflation, stocks have proved to be anything but a hedge against rising prices.

As a result, small investors have pulled out of the market by the millions to put their money into bonds, land, coins, wine--anything that is either tangible or seems less risky than shares. Trading consists mostly of transactions between the big institutions: mutual funds, pension funds, bank trust departments. And managers of the pension funds, who invest more than $100 billion, have a special reason for worry: Congress in 1974 passed a law permitting receivers of pensions to sue managers of the funds for poor investment performance. Fearful fund managers have adopted a supercautious strategy, setting themselves the modest goal of only matching the performance of the popular stock averages, and pulling out of an issue any time they can turn a small profit.

Where will it all end? Bear markets eventually give way to bull markets, and some computer-equipped analysts now think that the Dow could lumber up to 950 or even 1050 by late 1978 or early 1979. Maybe --but that sounds all too reminiscent of the wrong predictions being made a year ago, when Wall Street's mood was one of relative cheer.

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