THE REASONS for it aren't rosy, but the extraordinary rise in the stock market makes an important contribution to economic stability. It's that rarest of financial phenomena, an unmitigated benefit to every public and private interest. It reflects the somber judgment among investors that the recovery from the current recession will be meager and long delayed. That means low interest rates and strain on some parts of the banking system. Suddenly, in comparison with the various other places to park money, the stock markets begin to look very attractive.
The Dow Jones Industrial Average is now over 1000 again. But you ought not miss the other signs of strength that are now apparent. For most of the past several years, the conventional view has held long- term bonds to be perennial losers best left to the speculators. But Henry Kaufman of Salomon Brothers pointed out last week that the total return on a typical high-grade industrial bond over the past 12 months was 45 percent. For a time, beginning several years ago, it looked as though high and fluctuating interest rates might destroy the market for corporate bonds altogether. But it is surviving and beginning to prosper again--a development as significant as the simultaneous revival of stock prices.
It's good for investors' morale, but that's the least of it. The years of sinking stock and bond prices were a severe drain on the financial strength of American companies. Some companies responded by cutting investment. Others went to the banks for short-term credit to finance long-term investment --a tactic that left them dangerously exposed as interest rates suddenly started to move upward again. The increasing dependence of American corporations on this kind of bank debt, and the instability that it implies, has been a source of sharp and justified concern.
But while the Dow at 1000 is an encouraging sight in comparison with the most recent past, it is also a reminder of the enormous erosion of stock prices over the past decade. The Dow first reached that level toward the end of 1972. If the stocks counted in the average had only kept abreast of consumer prices, the Dow would now be around 2300. To put it the other way around, those leading stocks today are worth less than half as much, in terms of purchasing power, as they were in 1972. The recent rise is encouraging. But the record of the past 10 years is still, on balance, one of extraordinary losses suffered by people who have tried to save and invest their money.