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...annual rate of more than 2 million, a cool 46% ahead of a year earlier; corporate profits increased 11.4% in the second quarter. But all this was lost on Wall Street, where stock traders continued to fret about everything from interest rates to new tax legislation. The Dow Jones industrial average, the market's most widely watched barometer, dropped 7.62 points last week, to 863.48, its lowest since the first day of trading in January...
...aberration? Hardly. Though economic recovery is continuing, stock prices have been sinking all year; the Dow is now more than 14% lower than it was on New Year's Eve. And the 1977 sag only climaxes a decade of disappointment. Indeed, the stock market, once a great driving force and sensitive indicator of the U.S. economy, has been steadily losing its vigor, and its hold on investors' minds, for most of the past dozen years...
...back in January of 1965, the Dow Jones industrials cracked the 900 level for the first time. Since then, the average has been on a roller-coaster ride-dropping as low as 631 in mid-1970, soaring as high as 1052 at the start of 1973. But it has been a ride to nowhere; after all the ups and downs, the average is just about where it was a dozen years ago. Moreover, even those figures badly understate just how dismal the performance has been. Stock prices have been stagnating at best while prices of just about everything else have...
...large part of the rise in corporate profits is an illusory result of inflation. So a dollar of company earnings is no longer worth as much on the price of that company's stock as it used to be. Even in late 1976, the 30 stocks in the Dow Jones industrial average were selling at a price of 10.4 times earnings; the estimated price-earnings ratio for 1977 is less than eight. Avco, Chrysler and Rapid American shares are selling at only about three times earnings...
...these investors, and others like them, be lured back into the market? Perhaps, but the process will take years. Doubtless, stock prices will have their upswings in forthcoming years, and those that take the Dow average above the magic 1000 mark may stir some temporary excitement. But the essential condition for a sustained bull market is a long and strong economic advance, during which inflation simmers down well below its present rate of roughly 6%. How to produce that ideal combination is the central unresolved question of modern economics...