Tabell’s Market Letter – March 24, 1972

I I TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON. NEW JERSEY 08540 DIYISION OF MEMBER NEW YOAK STOCK EXCHANGE, INC. MEMBER AMERICAN STOCK EXCHANGE March 24, 1972 We presented, last week, a synopsis of the monetarist economic view together with a capsule history of the economy over the past 25 years tending to support certain assumptions of that view. We would like-; this-week,- to'ekplorefurther the effects-of-changes'in'the money supply-an-inflation and, further, on the stock market. The table published last week showed that the average annual change in the stock market over the past 25 years has been just under 9. Column 1 of the table below shows the percentage change in the S&P 500 for the eight years of greatest increase in the money supply and column 2 shows the percentage change for the eight years of least increas e in the money supply. It should be evident that increases in the money stock tend, immediately at least, to be good for the stock market. Six of the eight years in column 1 produced above-average stock market increases and the average of the eight years was one-third greater than the average for all 25 years. Even more striking is the effect of monetary stringency on the market. The average performance for the eight years of least increase in the money stock was a 1. 88 decline and these eight years include five of the seven down years that have occurred over the 25-year period. Column 3 takes the eight years of greatest money supply increase and shows, for each year, the amount of price increase, measured by subtracting the in- crease in real GNP from the increase in actual GNP. The average of 3.77 Is significantly above the 25-year average of 3.18. The fact that increases in the money stock tend to a) benefit the stock market and, b) cause inflation may lead to the aS,sumption that inflation is beneficial for stock prices. Clearly, however, over the short run, Inflation Is not helpful to common stocks. Column 4 shows the change in stock prices for the eight years of greatest inflation. The average gain Is a miniscule 1. 2 vs. an average market increase of 8.949'0. By contrast the eight years of least inflation shown in column 5 produced – -anaverage -6f–p-ercentClge gain 'for-th-esto-ck-markeYa-lm-osttwlcea-s'great-a-s -th-e-overaU-average; – – – I Years of Change Years of Greatest In Least Change Years of Increase Years In Greatest In of Change Years in of Change in Rise In Stock Rise in Stock Rise in Prices Greatest Stock Least Stock MoneySup. Prices MoneySup. Prices MoneySup. Inflation Prices Inflation Prices 1968 1967 7.66 20.09 1948 1957 – 0.65 -14.31 1968 1967 4.26 3.22 1947 0 1949 10.26 1951 16.46 1953 – 6.62 1971 1951 11.67 1960 16.46 1949 – 2.97 1971 10.26 1951 4.77 7.40 1948 – 0.65 1962 -11.81 1970 0.10 1961 23.13 1970 1965 1964 0.10 9.06 12.97 1959 1953 1956 8.48 – 6.62 2.62 1970 1965 1964 5.49 1.99 1.63 1969 -11.36 1963 1971 11.67 1950 1968 7.66 1954 18.89 21.78 45.02 1950 21.78 1962 -11.81 1950 1.41 1957 -14.31 1955 26.40 Average 12.47 – 1.88 3.77 1.20 15.88 With all of the above as prologue, we can take a glimpse into the future. First of aU, as suggest- ed last week, five years of an above-average increase in the money stock have produced a high rate of inflation causing the implementation of wage-price controls. (The monetarist view that, had money policy been more intelligent, the controls would not have been needed in the first place is impliCit.) In order to ascertain its implications, recent monetary policy must be examined more closely. The total money supply increase in 1971 was a high 6.2. This increase was achieved by U.6 annual rate of growth in the first seven months and a miniscule 15rate in the last five months,'all of which may have had something to do with the poor performance of the stock market throughout most of the second half. For 1972 a policy of stimulus is apparently being followed with the annual rate of change approaching 9 for the first 2 months of the year. We find ourselves, in other words, on the horns of a dilemma. Continued growth of the money supply will obviously benefit the stock mar- ket over the short run, and indeed that growth may account for the nearly flawless technical con- dition of the market at the present time. The dangers of continued growth, however, suggest the possible renewal of inflationary pressures. A certain skepticism regarding the efficacy of Phase 2 in combating these pressures must also be expressed. Such pressures might well lead, later in the year or in 1973, to a more stringent monetary policy. And, as the figures above quite clearly show, neither inflation or tight money tend to be particularly beneficial for the stock market. Dow-Jones Industrial (1100 a.m.) 945.36 ANTHONYW. TABELL S&P (1100 a.m.) 107.81 DElAFIELD, HARVEY, TABELL AWT'mn No statement or expreSSIOn of opinion or any other matler herein conlaliled IS, or IS to be deemed 10 be, d.rec1lv or Indirectly, an offer or the sollcllohon of an offer to'buy or sell any seCUrity referred 10 or menhoned The mailer IS presented merely for Ihe convCrlence of Ihe subscriber While oNe believe the sources of our mfarmolion to be reliable, we m no woy represent or guarantee Ihe accuracy thereof nor of the statements mode herein. 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