Stock market lays low pending inflation action

With interest rates and inflation registering sharp increases, the stock market skidded downward to a two-month low in its worst week this year. The Dow Jones industrial average closed at 820.56, posting a loss for the week ending March 7 of 42.58 points. That was the worst overall decline since a drop of 58.62 points for the week ending Oct. 12, 1979.

The close was the second lowest of the year, exceeded only by a low of 820.31 recorded Jan. 3. Trading was active throughout the week.

The market is presently in a highly concerned "wait and see" attitude -- pending President Carter's announcement of a new federal anti-inflation policy, noted Ronald Masci, manager of a Washington, D.C., office of Dean Witter Reynolds, Inc.

The administration is known to be considering a variety of possible options, including selective credit controls (excluding controls on the troubled auto and housing markets), slashes of some $15 billion in the proposed fiscal year 1981 budget, plus cuts of around $4 billion in the fiscal 1980 budget, now about half over. But what investors specifically want, says Mr. Masci, is "clear indication" that the administration will "follow through" on its programs to stem inflation, now reaching close to 20 percent annually.

For thousands of investors and market watchers, the past week was worrisome from a number of directions, capped perhaps by the announcement March 7 the Citibank, the nation's second largest commercial bank, was raising its prime rate one-half point to a record 17.75 percent. Harris Bank & Trust of Chicago followed by hiking its prime to an unprecedented 18 percent. Though other banks were not expected to immediately follow the Harris lead, many analysts quickly assumed that a 20 percent prime would not be far off.

Further bothering the market was the new Friday that the government's producer price index showed the cost of goods at the wholesale level surging ahead 1.5 percent in February. That works out to an annual rate of 19.6 percent. Since the consumer price index tends to follow the the producer index, the explosion in February producer prices spells trouble for Mr. Carter and could well increase pressures for wage and price controls, now resisted by the administration.

The cummulative impact of soaring interest rates and inflation is particularly pronounced now, says Robert Wolf, associate manager of A. G. Edwards & Sons, Alexandria, Va. "Everyone is holding their breath and waiting for Mr. Carter to take bold action on inflation," he continues. In the meantime , that means a "short-term sensitivity to any adverse kind of economic news." The performance of the market, he says, is now directly related to daily newspaper headlines, running the gamut from adverse news from the Middle East and Iran to spiraling inflation within the US.

If there was any silver lining to the last week's grim parade of economic developments, it was that the nation's jobless rate dipped to 6 percent in February, down from 6.2 percent in January. But even that had a somewhat unwelcome tinge in financial circles, indicating that the long-delayed recession was still down the economic roadway. Many economists now believe that a recession is necessary to cool the overcharged economy.

But while some recession may be "welcome," the "calibration" of that downturn is considered crucial.

Precisely because of the delay in the long-expected turndown, there is growing concern here about what could well be an announcement by the administration this week imposing selective credit controls. Mr. Carter has promised to reach a decision on his new anti-inflation plan early this week. Controls, if they come, would be expected to exclude the troubled housing and auto markets.

Yet, any form of selective controls, however limited, is considered risky for the economy and would be expected to add an immediate downward tug to consumer-related stocks. Some analysts here note that while overall consumer spending is still rising, it is not keeping up with inflation. Thus, figures released last week showed that while sales at K Mart corporation, the nation's second largest retailer, rose 18 percent during February over year-earlier figures, sales at Sears, Roebuck & Co. (the nation's largest retailer), J. C. Penney, and Montgomery Ward rose only 4 percent, 5 percent, and 2 percent respectively in the same month.

Underscoring the adverse impact of the week's economic news on the market, oil and natural resource stocks -- all of which up to last week had been helping to shore up the market -- posted declines. Included were such stocks as Exxon, Texaco, Indiana Standard, Cities Service, Marathon, Getty, and Homestake Mining. While the dollar closed upward on most international markets, gold and silver closed down.