Declining interest rates, market rally put grins on faces of investors; Stocks begin looking beyond current gloom
Out of the welter of confusing signals from the US economy, two conclusions emerge: Some tough months lie ahead, with unemployment increasing, bankruptcies -- both personal and business -- on the rise, and a few key industries, notably housing and autos, in serious trouble.
All this will require President Reagan to revise his priorities and perhaps his policies, as the government copes with the depressed period just ahead.
Already, however, a glimmer of hope can be seen on the horizon, exemplified above all by a slow decline of interest rates.
Even as the recession deepens, in other words, the seeds of recovery are being sown.
This perspective helps to explain why the stock market soared at the end of last week, apparently signaling greater investor confidence in the future, although the week's economic statistics were dismal.
Housing sales slumped, Detroit's embattled carmakers reported third-quarter losses totaling nearly $1 billion dollars, and key indexes of economic health -- including productivity, industrial production, and the rate of factory utilization -- all dropped.
Finally, the government's index of leading indicators -- designed to spotlight future trends in the economy -- plunged 2.7 percent in September, the worst monthly drop since last year's recession.
Small wonder that US Treasury Secretary Donald T. Regan stripped aside the administration's veil of optimism enough to say that ''probably'' Mr. Reagan's goal of a balanced 1984 budget cannot be met.
Yet the stock market climbed nearly 20 points on Friday, Oct. 30, as though battening on all the bad news. Why?
Clearly investors looked elsewhere for their cue and they found it in what happened to interest rates on several fronts.
First, economist Henry Kaufman, whose forecasts carry much weight on Wall Street, predicted that interest rates would fall by the end of the year, though he cautioned that in his view rates would rise again in 1982, when the expected recovery takes hold.
Investors fastened on the first part of his prediction, finding substantiation in the downward drift of the prime rate, which now stands generally at 17.5 percent. Mr. Kaufman foresees a 16 percent prime by the end of 1981, 4.5 points lower than the 20.5 percent of last July.
Meanwhile, the Federal Reserve Board cut its discount rate -- the rate charged by the Fed on loans to member banks -- from 14 to 13 percent, plus a 2 percent surcharge to banks that are large and frequent borrowers.
Lower interest rates help the stock and bond markets in two ways. Money market certificates and other high-interest securities become less attractive to many investors when interest rates fall. They look again to the long-term growth potential of stocks.
Businessmen also find it easier to borrow money for inventories or expansion when interest rates decline. Brisker business implies future profits and higher value for affected stocks.
Recession brings financial hardship to millions of Americans -- a high price to pay for wringing some heat out of inflation and interest rates.
If recession can be said to have any benefit, it is to the extent that inflation can be bumped lower in a permanent way.
Workers may be forced by economic circumstances to make their contribution by accepting lower wage and benefit hikes than those to which they have become accustomed.
Then it will be the turn of government, starting with President Reagan, to design policies that achieve what no administration over the last decade has been able to do -- get the economy growing again, without reigniting an upward surge of prices.