Some Hope for Battered Stocks

Rarely has fear scored so total a victory over greed in the minds of investors as in the stock market of 1974. As traders worried about virulent inflation and mounting evidence of recession, many common stocks dropped to prices not seen since the 1950s. Rallies were brief and whimsical, reflecting sporadic technical adjustments rather than any lasting return of investor confidence. The Dow Jones industrial average sank to two twelve-year lows in two months, most recently on Dec. 6 when it dropped to 578. It closed last week at 593, up 15 points for the week but still 31% below the start of the year and fully 459 points below its alltime high of 1,052 in January 1973.

Partly because the past year was so bad, the outlook for 1975 is somewhat brighter. If nothing else, analysts say, stock prices have discounted just about all the bad news that can be realistically expected and are due for an upturn, perhaps by spring, that could gradually push the Dow to around 800 by year's end (no higher than it was in early 1964). Their major reason: as the worsening recession bites into corporate profits and the rate of inflation, investors will sense that the economy is about to bottom out and will begin buying in advance of any real upturn. Stock traders usually do behave that way: share prices so often drop before a recession begins and then turn back up before a recovery starts that they are classed as a leading indicator of the economy. One factor, however, will serve to limit any rally: institutional investors, such as banks, pension funds and insurance companies, have become nearly as disillusioned with common stocks as individual investors. They may ride any rally to the point at which they recover recent stock losses, then sell some of their holdings in order to buy bonds and real estate. Their selling will tend to temper rallies, but any prediction is iffy at best, and heavily dependent on moves by the Administration and Congress to restore health to the ailing economy.

Even before the year began, stocks had taken one of their worst skids in history. Pressured by the Arab oil embargo, swelling uneasiness over Watergate and the worsening specter of inflation, the Dow lost some 180 points in 60 days toward the end of 1973. The widely followed indicator rose to its 1974 high of 892 in March, then began a perilous saw-toothed decline that seemed almost irreversible (see chart).

The rally that everyone hoped would follow the Nixon resignation never came. High interest rates, long blamed for driving investors out of stocks and into such interest-bearing securities as bonds and Treasury bills, began easing in early fall, but stocks still went down. The week after the Ford Administration staged its televised economic summitry in September, investors showed their skepticism by pushing the Dow below 600 for the first time since 1962.

The carnage left hardly any stock group unscathed, despite record corporate profits for most of the year. High-flying glamour issues withered. As of last week, Xerox was selling at 55, compared with its high of 170 in 1973. International Business Machines, a Wall Street darling for a generation, sold at 172, down from 340; Eastman Kodak was at 62 v. 152; McDonald's at 33 v. 77. Price-earnings ratios--a measure of investor confidence in companies' future performance--melted to strikingly low levels after having been absurdly high. Polaroid's p/e plunged from 90 in 1973 to 16 last week as problems with its SX-70 camera depressed earnings and drove the company's stock down to 20 from a high last year of 144.

As values plummeted, pension funds managed by banks took a fearsome beating, reducing worth of the "private social security" system built up for millions of U.S. workers. Morgan Guaranty Trust, the nation's largest private money manager, saw a 50% drop-off in three commingled pension funds. Among 86 banks and insurance companies managing $4.1 billion in pension assets, value was off nearly 32%.

Pounded by declining trading volume and waning investor interest, New York Stock Exchange member firms sustained combined pretax losses of $91.8 million through September. Since January, 33 Big Board firms have gone out of business and nine have merged. The result: an estimated 2,000 fully employed registered representatives have quit Wall Street this year alone, and legions more are looking to leave the demoralized industry.

Even a price rally will not help many small and medium-sized brokerages to recover. On May 1, by order of the Securities and Exchange Commission, all vestiges of Wall Street's once lucrative fixed-commission system are scheduled to be abolished. Stock buyers and sellers will be able to negotiate commissions on all trades with their brokers. While big brokerage firms will be able to compete, many smaller brokers may fall by the wayside. The projected toll: 150 firms by the end of 1976.

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