Wall Street Recession
DAVENPORT
By NICHOLAS
WHAT has been disturbing the City is not the dockers' suc- cess in attacking Mr. Lloyd's wage restraint, but the bad behaviour of Wall Street. In the old days it was impossible to have a rising market in Throgmorton Street if Ameri- can investors turned bearish, for it was assumed that a de- clining Wall Street heralded which would sooner or later a trade recession sweep across the Atlantic. This is not altogether true today because, with the rise of the dynamic Common Market in Europe, the influence of the American economy on world trade is no longer decisive. For all that, there is enough similarity between the American and British brands of capitalism to make a slump in Wall Street un- comfortable for investors in Throgmorton Street.
As I was arguing at the end of last month, the political arm in both countries has lately been attacking capitalists' profits and profitability. President Kennedy stopped the steel industry rais- ing prices to meet a rise in wages, Mr. Lloyd threatened to tax profits more savagely if 'the total income that goes to profit and dividends is excessive' and Mr. Henry Brooke, Chief Secre- tary of the Treasury, warned the Nottingham Chamber of Trade: 'It is no use dreaming that an incomes policy will be accepted for wages and salaries if it is not applied with equal fairness to profits. That does not mean that the profits or dividends of individual companies should be controlled by law. . . . It does mean that re- straint in wage and salary increases should not have the effect merely of increasing profits. The Chancellor keeps his eye on this.' The thought of Big Brother Lloyd watching the profits chart may not be enough to frighten the stolid con- servative investor out of his best equities, but there is no doubt that President Kennedy's attack on steel profitability frightened a lot of Ameri- can and foreign investors out of Wall Street.
Have we both got 'profitless prosperity' in our Welfare States? The disturbing fact is that the net profits of American corporations have not managed to rise in total, except occasionally, since 1950, all increases in productivity having been absorbed by higher wages, fringe benefits and higher taxes! Clearly, Wall Street would be mad to go on pushing up the prices of equity shares if earnings are not going to follow. Yet between 1950 and 1961 the price-earnings mul- tiple rose from eight to twenty-two: after the recent setback it is now twenty. An earnings yield of 5 per cent. for 'non-growth' is still high I Here the orthodox economist will pull me up with the remark that the net earnings of Ameri- can corporations in the first quarter of 1962 did show a distinct rise. Official estimates put the total at the annual rate of $53,000 million (before taxes) against $40,000 million in the cor- responding quarter a year ago. This was to be expected. The massive spending programme of the new Administration had stopped the mild recession of 1960 and had turned the economy upward. The President's new economic adviser, Dr. Heller, has estimated that the GNP would rise 9 per cent. this year to around $570,000 million. (The independent Professor Samuelson merely corrected this to 8 per cent.) But wha( Wall Street is saying is that with the first quart ter's rise most corporation earnings will be reaching a peak. It has noted that the rise over the fourth quarter of 1961 (then at the annual rate of $52,000 million) was very slight and fears that before the end of the year earning will be turning down. The economist Mr. Eliot Janeway, who is responsible for a very alai business research service, has been bold enough to say: 'Business activity has topped and reces• sion number two of the sagging Sixties has started.' It seems that in spite of good auto• mobile sales, consumer spending and housing starts have not lived up to bullish expectations. Instead of stocking up, business is living, as it were, from hand to mouth and is revising its; investingprogrammes downward. 'The general, decline,' says Mr. Janeway, 'is being dramatise( by the cut-back in steel production, which is on its way back down to 50-55 per cent. opera- tions.' When steel leads, the production index generally follows—and finally the GNP. Another mild recession is therefore not impossible.
This prospect is enough to turn Wall Street bearish, especially after the President had shown his indifference to corporation profits. And the market was overdue for a fall. The Dow Jones index of industrial shares had moved from a pre-election low of 567 to 735 by the end of I961--a rise of nearly 30 per cent. It has sub- sequently dropped to 6311 and recovered to over 640. A friend with a long experience of Wall Street has just written to ask whether we shall ever see the index again in our lifetime at over 735. He was thinking of the high of 386 on the eve of the great crash in 1929. It took twenty- five years (cum war and inflation) to reach that level again.
If the cult of the equity is really losing its grip on the public, there is good reason to expect Wall Street to drift lower after some recovery, especially in the growth stocks. But What does the cult of the equity mean? It im- plies that an equity share will be preferred to a bond for long-term investment if the earnings of the company can be relied upon to grow and if an earnings yield in excess of a bond yield is Offering. The trouble is, the American economy has reached a point where a heavy budget deficit 110 longer has the power seemingly to boost com- Pany earnings—and where a still heavier budget deficit cannot be taken on without causing another flight from the dollar. So I would not care to be a 'bull' of the Dow Jones index today.
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