Writing on the Wall . . . Street
Charles Stahl
With the rediscount rate at a record 8 per cent, the prime rate at 11 per cent, and possibly headed higher, there is no denying that the Federal Reserve System is doing its best to crack the steepest inflation rate in the history of the US. When in September 1973 the prime rate was raised to 10 per cent, a then record, the Dow Jones industrial average was hovering around the 830 area. It is only slightly lower now.
There is an adage on Wall Street that price movements on the London Stock Exchange usually precede similar action at the New York Stock Exchange; since the London averages recently made new lows, the stock prices in New York could still move lower than the current 825 level of the Dow Jones Industrial Average. However, we believe that anY decline from current levels offers excellent opportunities to enter the US stock market.
It is our contention that the market is discounting not only the high rate of inflation, but also the Watergate sickness and all related ills. History has taught us that the stock market always overreacts. Therefore, assuming that a presidential impeachment is a real probability, the final outcome of this ordeal should be bullish for the stock market and the general economic activity of this country. If President Nixon is not removed from office after a trial before the Senate, then the Watergate cloud will disperse, and stock prices will move higher; if President Nixon is removed from office, then the market obviously would greet the new President with a rising ovation.
The best time to buy stocks is when nobody wants them. It appears that such a time may well be at hand, since well-funded companies are now selling at a 6 times price/earnings ratio.
Charles Stahl is editor of Green's Commodity Newsletter and runs the Economic News Agency.
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