Two events take place at the New York Stock Exchange this morning that will tell us a lot about the current state of the investing art.
At precisely 10 o'clock, the opening bell will sound and traders will resume their work in buying and selling stocks, after a week in which Wall Street suffered a trauma of the worst losses in nine months. Investors, shell-shocked by new interest rate increases in the Federal Reserve Board's lonely war on inflation, will have had time to digest the depressing news of the past few days. Anything can happen.
At the same hour, upstairs in the NYSE board room, exchange Chairman William Batten will make public a long-awaited study that will show just how many Americans continue to invest in American corporations. The last such survey, conducted in 1975, was a foreboding document that revealed a sharp, 18 percent decline in the number of U.S. stockholders to just 25 million persons.
The mid-1970s NYSE survey showed clearly that this country was facing a major problem -- the growing inability of business to raise capital by selling stock to a public that was wary of losing its shirt. And fewer individual stockholders was a danger signal to the ideals of spreading wealth through corporate ownership and making business more broadly accountable to the public, since companies with public ownership have a responsibility to communicate about their activities.
Little has happened since 1975 to indicate any change in the trend toward corporate share ownership, but today's report may have some hopeful hints.
As for the volatile stock market itself, there is almost no hope that overall share prices can rebound substantially in the current, gloomy environment. The Dow Jones index of 30 blue chip corporate stocks plummeted 37.11 points to 956.23 last week, after topping 1,000 last month in the euphoria that followed Ronald Reagan's election.
Locally, Johnston,Lemon & Co.'s index of 30 Washington blue chips also was down sharply to 141.388 from 144.124 a week earlier and a recent high of about 150.
By raising the discount rate to member banks to 13 percent, along with a 3 percent surcharge for large borrowers, the Federal Reserve emphasized its resolve to fight inflation by reducing the availability of bank reserves and curbing money stock growth, noted analysts at Commercial Credit Co. in Baltimore.
The key federal funds rate, charged when banks lend overnight to another bank, soared to 21 percent on Friday from a recent range of 17-18 percent. Bank rates for borrowers at stock brokerage firms (people who borrow money to buy stocks) jumped to 20 1/4 percent. Two large banks increased their prime lending rate for top corporate customers to 19 percent from 18 1/2 percent, and banks in the Washington region are expected to follow suit today and tomorrow.
But still, the nation's money supply continues to grow (up $1.2 billion in the last week of November, not huge but still an increase and not a decline). All these factors point to still higher interest rates. Are you ready for a prime rate over 20 percent, the peak hit early this year?
The difficulty, according to an analysis by Commercial Credit on Friday, is that business borrowing remains strong despite all of the pressures. In many cases, interest rate costs of business are simply passed along to the hapless consumer. Companies can't face the bond markets, where costs are too high, and they can't sell new stock. Retailers borrow money to have goods on the shelves for the critical holiday season. So they go to the banks and pay a premium for short-term money.
At the same time, there are indications that this crazy business has got to stop. Inventories of unsold houses and cars are building up, because consumers won't pay mortgage rates over 14 percent and won't buy a car for everyday purposes that costs $8,000. Bankers are anticipating a substantial slowdown in loan demand growth over the next six months, a period that will see rising unemployment, deteriorating sales and the first 100 days of Ronald Reagan's presidency. And don't forget the possible impact on inflationary expectations from political or military developments in the Middle East and Poland.
Washington economist Michael K. Evans is convinced that interest rates are at or near their peak and that a sharp decline will follow through next March. But he says the plunge won't start until money supply expansion diminishes.