Anti-inflation proposals fed into 'computer'
The big question facing market watchers following the announcement of President Carter's new anti-inflation plan last week was clear-cut: Will investers accept the complicated proposals as a serious administration effort against a near 20 percent inflation rate and once again enter the market?
The issue is hardly academmic. The Dow Jones industrial average closed at 811.69, down 8.80 points for the week ending March 14. The falloff marked the fifth consecutive week of decline in a relatively quiet trading period. Equally ominous to market watchers here was the continuing upward movement of the prime rate as Citibank hiked the interest rate it charges its biggest customers to 18 1/2 percent from 17 3/4 percent.
Initial reaction to Mr. Carter's proposals, which include severe cuts in the fiscal year 1981 budget plus selective credit controls, ranged from initial criticism to skepticism that the steps would be adequate enough to forestall continuing price hikes. Some analysts, however, argued that the continuing credit-tightening policies of the Federal Reserve Board might now be so severe as to push the economy into a deep recession.
For last week, however, there was clearly little enthusiasm from the market investors. "They're canceled the market," laughed George Hannaway, manager of the Silver Spring, Md., office of Paine Webber. Mr. Hannaway, who was interviewed just prior to the announcement of Mr. Carter's anti-inflation plans, said he expected the policy to lead to a "short-run rally" for the market. But whether that would be sustained for a long period of time, he said, was highly questionable. That would depend on how well the general public perceived Mr. Carter as "meaning business" about controling the now- soaring inflation rate.
According to Darrell Brookstein, president of First Georgetown Securities, in Washington, D.C., the slow pace of the market last week -- pending the announcement of Mr. Carter's planned action -- was "unbelievable."
Mr. Brookstein also anticipated a "temporary boost" for the market. But he doubted Mr. Carter would take action that would be "strong enough" to curb inflation. Still, he says he remains optimistic about the market in the long run, particularly natural-resource stocks.
The main criticism here about Mr. Carter's program stemmed from concerns that the massive budget slashes -- essentially pegged to the fiscal year 1981 budget which starts in October -- were too far down the economic roadway to be immediately effective. The proposed $4.62 per barrel tax on imported oil was also seen as being too inflationary.
There was also mounting criticism from many financial analysts here about new Fed restriction on money market mutual funds. The net effect is seen as preventing new investors and young families from offsetting spiraling inflation by joining such a fund.
If any word seemed to characterize the performance of the market this past week, it was "moribund." Oil and key energy stocks, which had been helping to shore up the market until the past several weeks, sagged. A number of key defense and computer stocks were under strong pressure. Consumer stocks were considered high risk by many investors, given Mr. Carter's decision to impose credit controls.
But that did not mean total gloom among analysts. Mr. Hannaway, of Paine Webber, for example, argues that defense stocks will still show growth in the period ahead. He is also strong on natural-resource and oil issues, given continuing energy demands.
Many analysts, moreover, are noting that investor concerns may now be switching from inflation to deflation -- and as a consequence benefiting issues that would hold up in a recessionary environment.
But is the long-awaited recession finally around the corner?
There were hints of that. Retail sales, for example, fell 0.7 percent in February to $78.98 billion. That was after a jump of 3.3 percent in January, and was the first decline since October 1979. Also, according to the air transport industry, overall passenger traffic on commercial airlines fell 0.6 percent in January, the first recorded downturn since the 1974-75 recession.
It was also announced by the government last week that car sales were down 8. 6 percent for the first 10 days of March. But all the same, they were higher than had been anticipated.
Still, most economist are not yet certain that the downturn has arrived. Some analysts believe that consumers were holding back spending while awaiting Mr. Carter's anti-inflation plan.
On a positive note, the dollar closed out the week at its highest levels of the year, while gold and silver prices dropped sharply. Analysts credited the steps to anticipation of Mr. Carter's anti-inflation plans.