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PHIA FEBRUARY 1961 BUSINESS REVIEW The Royal Family Grows Restless The Big Bull Market of the 1950's BUSINESS REVIEW is produced in the Department of Research. Lawrence C. Murdoch was primarily re sponsible for the article “ The Royal Family Grows Restless” and Bernard Shull for “ The Big Bull Market o f the 1950’ s.” The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to the Bank and Public Rela tions Department, Federal Reserve Bank of Philadelphia, Philadelphia 1, Pennsylvania. THE ROYAL FAMILY GRO W S RESTLESS In the American economy, every family is a The shift away from these “ hard” goods may royal family. Each consumer is a king, queen, have a significant effect on the course of busi prince, or princess. No mere figureheads, they ness. The products and services consumers covet dominate and rule the economy. The royal family of consumers buys about today do not have the explosive impact on the economy that durables and housing have. The two-thirds of all goods and services produced. dollars spent in 1961 may not ripple out quite And consumers wield despotic power. They can so far or so fast or create so many jobs as impose their wills on governments through the they once did. Compare the immediate effect on ballot box, and on businesses through free mar kets. production of S3,000 spent for an automobile The royal family now seems to be getting rest less after being relatively set in its ways through But if the new spending mix is not so stimu lating neither is it so volatile. Durables and much of the postwar period. Consumers them housing are subject to wide cyclical swings. By selves are changing and so are their spending spending more of their money for other things, habits. Spending has shifted away from some old consumers may be adding a note of stability to standbys and this could be an important cause the economy. versus S3,000 spent for college tuition. of the current business setback. Some of our The royal treasury is bulging. Incomes should present excess plant capacity and unemployment remain high in 1961 and consumers will spend certainly are located in industries whose prod record sums. But the royal family will probably ucts consumers no longer favor. Anthracite coal remain restive for some time. Consumers are is the classic example but durable goods and more sophisticated and have more complex houses should not be overlooked. Consumers are wants. They are more choosy and harder to budgeting a smaller share of their income for please. They are interested in real value and these items than in previous years. will pay to get it. Sharper shoppers, consumers 3 business review should be harder to manipulate. The creation of probed by marketing men for decades. Know artificial demands through frequent style changes what the average consumer would do and you and “ hidden persuader” advertising is becoming knew what consumers in general would do. In more difficult. In short, the royal family is turn other words, the early post-World War II con ing into something of a tyrant and businessmen sumer market was relatively cohesive and pre will have to work harder than ever to serve by dictable. Families tended to spend as units and “ appointment to their majesties.” Yet the re the units often behaved in much the same ways. wards will be great for the firms that make the The concept of the average consumer, the easy-to-understand model of all consumers, has grade. Aside from the broad drift to services, no clear much less validity today. The consumer market new consumer spending pattern has emerged. In has begun to atomize— to split into many auton stead there seems to be a churning of trends— a omous markets and submarkets. Family members kaleidoscope of demands. This may be just a gusty are spending more as individuals and neither interim before the winds of trade steady in a families nor individuals seem to fit neatly into definite direction. Or it could be a permanent any inclusive mold. No longer is the market well- thing. It could be that consumer spending during gauged by over-all averages. No longer does it the early part of the 1960’s will be characterized have a single spokesman. by the lack of a neat pattern such as we have The consumer market has divided many seen in the past. This is a real possibility for con ways— by age, sex, marital status, race, region, sumers are subject to some very complicated, and income, to mention but a few, and each group somewhat contradictory forces. exercises discretion over increasingly larger sums In this article, we sketch, as we see them, a of money. few of the many changes that have taken place in the consumer market. Some are psychological, W hat made spenders splinter? some sociological, some economic, but all could The fragmentation of the consumer market has affect the way consumers spend their money— a number of causes. Most important, perhaps, is which products they favor and which they ban the great rise in discretionary income— income ish to oblivion. It is difficult if not impossible left over after the essentials of food, clothing, to measure the extent of these changes or indeed and shelter have been bought. This is income to prove they actually have taken place. Further consumers can spend as they choose— for steaks, more, many of their impacts and effects must, of stereo sets, travel, etc. The National Industrial necessity, be based on conjecture. We offer the Conference Board estimates that discretionary following income has risen 64 per cent since 1946. interpretations only to stimulate thought and discussion about the consumers of the 1960’s. The broad diffusion of income is another key feature. Increases in income have spread through out the entire economy. Vast numbers of people THE DEATH OF A SPOKESMAN have moved up from subsistence levels and now The average consumer was a faceless spender have money for other purposes. Many minority who spoke for many millions of his fellows. groups— Negroes are an example— have enjoyed Born of myriad surveys, he had been pried and greater-than-average income gains. 4 business review The rise in income has liberated individual arrangement. They put up with it because there spenders within families and has magnified dif was no choice. They were ready to move out ferences among families. We don’t mean to when they got the chance. For many, the chance imply that consumer spending patterns were came in the late 1940’s. A great number of once all the same. houses were built There have always in the years fol been important va lowing riations, of course. and many existing The point is that structures were the patterns have converted into grown apartments. Young considera bly more diverse couples the war went to in recent years. In development “ cas the early part of tles” the postwar period, the “ G. I. Bill.” consumers seemed Aunt to moved to her own have more financed on Harriet spending goals in apartment. common. people had hefty Let’s flash back Many to the end of the war— “ that wonderful year,” accumulations of wartime savings which were a big help in getting 1946. It was the year that the Red Sox played the started on their own. This undoubling process is Cardinals in the World Series and Joe Louis the reason that the average size of households has fought Billy Conn for the second time. “ Annie declined during the postwar period in spite of the Get Your Gun” was the big hit on Broad prevailing high birth rates. way and all over the country hemlines started down. A lot of new spending units were created, amoeba-fashion, but families still had many On the home front, 1946 was the year of the needs and desires in common. Two things stand in-laws. There was a housing shortage and fam out above the others— automobiles and appli ilies doubled and tripled up. Returning service ances. Many people had gone without these men and their brides moved in with parents glamour goods during the depression for the lack who already may have been harboring a selec of income, and during the war for lack of pro tion of grandparents and unmarried siblings. duction. Again, families tended to spend as a And don’t forget Aunt Harriet who had moved unit. They devoted much of their incomes, sav East to do war work. ings, and borrowing power to get their automo Incomes were partially pooled and much spending was done by the household for its mem biles and appliances and they didn’t have too much left over for other items. bers. Individual tastes and preferences tended to Consumers stocked up on durables during the be laminated into a single market unit. Most people didn’t really like this communal latter 1940’s and part of the 1950’s. In the past several years, however, the original demand has 5 business review become pretty much a replacement demand. Children up to ten years of age spend little them There is now one car on the road for every two selves but they determine how hundreds of mil persons over 18 years. Of all wired homes, 98 lions of dollars are spent. Television, the electronic per cent have refrigerators, 93 per cent have baby sitter, has made this market. Small fry spend washing machines, and 90 per cent have tele hours watching Yogi Bear, Captain Kangaroo, and other heroes plead “ tell your mother to get vision. Replacement demand is much less dynamic. a package of Super Crunchies.” Food, candy, Purchases can be postponed almost indefinitely clothes, and toys are the mainstays of the mop pet market. by judicious repairing. Furthermore, the mouth watering excitement of durables has been re It is hard to define the senior market. How do duced by ownership and familiarity. Today, you tell when a person is old? One way we have consumers have larger portions of their ever-in heard is when a woman is more interested in creasing income left over to spend as they wish. the fit of her shoes than the fit of her sweater. new Statisticians usually take a more prosaic ap spending trend has taken the place of houses proach and draw an arbitrary line at age 65. As we pointed out, no single-minded, and durables. Instead, the flow of discretionary There are 16 million people over 65 and they dollars seems to be darting like quicksilver in spend approximately $30 billion a year. They many different directions. devote a relatively higher percentage of their Other postwar developments also have helped shred the consumer market. They are well- income to housing, household operation, food, and medical care. known and we shall only mention them here. The Negro market is expanding rapidly as the Increased education has changed tastes and di economic status of the Negro improves. Negroes versified desires. Widespread travel has had a spend about $20 billion a year for goods and broadening effect, pulling many out of their services. Their greatest need is for good hous buying ruts. The growth of leisure has given ing for which, when available, they are willing greater range to consumer demand. to pay top dollar. An Ebony magazine survey indicates that Negroes spend a greater-than- Meet the markets average share of their income for clothing, auto Not long ago teenagers were economically sub mobiles, food, and cosmetics. merged in the family spending unit. They had There are over 10 million single, adult con only nickel-and-dime allowances to call their sumers and their income is over $30 billion. own. Now our 16 million high school students They usually live alone in rented quarters, and spend an estimated $6 billion a year. The youth they tend to gravitate to the cities. Clothes, en market is highly specialized. Highschoolers em tertainment, and eating out are big items in phasize sports and sport equipment, clothing, their budgets. hobbies, movies, records, and, of course, food We also should mention the “ country club” and more food. As one writer puts it, the current market, the 7 million families with incomes over teenage greeting is often “ take me to your $10,000 a year. These folks can afford many larder.” kinds of luxuries and are highly receptive to The moppet market is growing in importance. 6 new products and ideas. business review Then there is the newlywed market and the but specialized fare. One local station plays only young parent market. People in the South have “ big band” music, principally the Tommy Dor a distinctive spending pattern, and so do West sey, Glenn Miller, Benny Goodman recordings erners, and those from other sections of the from the late 1930’s and early 1940’s. Several country. Suburban families have their own spe stations offer nothing but classical music, and cial needs. Spenders also differ by ethnic origin still others fill the day with rock-and-roll for and, to some extent, by religion. teenagers and culturally retarded adults. Finally, in many families husband and wife The splintering of consumer demand has have turned into separate spending units. They boomed the “ doubles” market. Families who have both have more money to call their own. Dad everything now are getting two or more of it— may treat himself to a shotgun and mother TV sets, radios, telephones, cars, appliances, and may choose French perfume or a new hair style. even houses. Since the second item is usually It is said that one-third of all married women to meet a specialized need— often for the chil hold jobs and that they add nearly $30 billion dren— it is likely to be of a different model or to the family coffers. Working wives spend more style than the first. than their stay-at-home sisters on clothes, per The growth of his-and-her products is further sonal care, restaurant meals, entertainment, and evidence of discretionary spenders within the household conveniences. family. Now mother and father may have their Split-level selling The existence of many separate consumer mar electric razors, soda crackers, and even Scotch whiskey (hers is lighter and mellower). kets makes merchandising more difficult. Many A legion of products is aimed directly at indi products do not appeal to all groups. Selection vidual markets. Specifically for the older folks, and variety are the “ buywords.” there are health products, retirement cottages, own separate types of deodorants, shampoos, Automobiles are a good example. Not long golf clubs with more whip, watches with easy- ago all available cars were much the same— big, to-read faces. Certain clothing styles, records, chromy, and expensive. Now automobiles are and books are slanted at teenagers. The moppet highly specialized. There is a car for every pur market is featuring space toys and cowboy guns pose this year. And so it goes in endless variety. and purse. For the drive-to-the-station commuter there is the foreign “ doodlebug” ; for Firms will have to learn more about their large families there are miniature buses; for customers— who they are and why they buy. the economy-minded there is a selection of com This may mean increased expenditures for mar pacts; for luxury-lovers and status-seekers there ket research. Advertising also has become more are several makes of “ show boats” ; for suburban complicated. With consumers behaving in un hauling there is the station wagon; for city average ways, the effectiveness of mass media dwellers there is a variety of easy-to-handle is weakened. There is, therefore, a trend to pin and easy-to-park models. pointed advertising. Some companies are making Radio stations also cater to specific consumer extensive use of spot announcements on local markets. In Philadelphia, and no doubt else radio stations. National magazines are accept where, there are many stations that offer nothing ing split-run ads that appear only in certain 7 business review areas. The right market can be reached once it agers, are small cogs subservient to the organi is known, but it may prove costly. zation. In many cases they must conform to rigid Producing goods for varied markets also may codes of behavior— right down to the clothes be more expensive. Specialized products must they wear. How many bankers did you see last be researched and properly designed. And they summer in sport shirts? often must be produced in smaller quantities But consumers are resisting homogenization than heretofore. and refuse to be entirely squeezed into a mold. This matter of costs is the crux of the chal lenge businessmen face. As the magazine Nation s Without rebelling against established conven tions they still are striving to express their indi Business puts it, “ We must shift from mass mar viduality whenever they can. They have more kets to custom markets for services as well as income than ever before and they are willing to goods without losing the efficiency of mass pro spend a good part of it to be different. duction and mass merchandising methods.” The splitup of the consumer market could be, in part, a reaction to these leveling forces. Origi THE BULLDOZER EFFECT nal art and handmade items, now enjoying a Powerful forces are working to bulldoze con boom, also may be antidotes to the bulldozer effect. sumers into a vast, amorphous mass. These The desire to be different helps to explain why forces tend to submerge the individual and exotic imports are so popular and why gourmet homogenize tastes and behavior. At first thought, foods are selling at a $250 million clip. “ Anyone it seems surprising that the consumer market for chocolate-covered caterpillars?” has atomized at all while subject to such influ ences. Television is one of the great levelers. Without Interiors of development houses are as differ ent as the outsides are similar. No two are deco rated alike. Furniture styles have run riot in the getting into the controversy, we can report that many critics claim television is programmed for an egalitarian audience. If Madison Avenue feels that the mass likes westerns, private eyes, and situation comedies, that is what everybody gets, hour after hour. Housing developments are another homogen past five years (see the November 1960 Busi izing force. Armies of similar box-houses stand ness Review) and one reason is the housewife’s in parade ranks on yesterday’s farmland. Most desire to display her very own tastes. development dwellers are about the same age, Home from the office, “ organization men” have the same income, and face the same prob shed their grey flannel uniforms and become lems— children, money, and crab grass, though rugged individualists in their leisure activities. not necessarily in that order. There is good Do-it-yourself satisfies the urge for distinctive reason for Suburbo-man to look, act, and think creation. Sports give the whole family ways to just like his neighbors. flex their identities. Good books and classical Giant corporations and giant unions also can impinge on individuality. Workers, even man 8 records provide ways to be different and they are also part of . . . business review THE “EGGHEAD” SYNDROME But not all the “ culturephiles” are real. No Culture is a hot item. There are 42 major doubt many adopt a veneer of culture for American symphony orchestras and hundreds of status purposes— a sort others associated with colleges and small com manship. Many like to think of themselves as munities. Phonograph record sales in 1959 were intellectuals when by any realistic test, they are 316 per cent of their 1950 level and “ serious” not. How many husbands yawn through a con records have cert because attending is the thing to do? of aesthetic one-up been doing at Self-imagery, however, can be just as important least as well economically as real appreciation. If consumers as the total. picture themselves as cultured, “ thinking men” About $1 bil or even if they want others to see them as such, lion is spent they will spend willingly for the trappings of cul each year on ture. This is one reason for the rash of advertis books — one ing campaigns with egghead appeal. of No matter what their own appreciation and that on ency backgrounds are, many parents want their chil quarter clopedias alone. About 55 million people visit dren to get genuine exposure to culture. This is museums each year. In 1959, twice as many New part of the reason for the increasing popularity of Yorkers visited the Metropolitan Museum of Art higher education. Higher education, in turn, has as saw the Yankees play baseball. The attendance at concerts has doubled since the war, and the a most important influence on consumer spend ing patterns. The total cost of a college diploma opera and ballet never had it so good. Painting is estimated to and sculpture have become hobbies for millions. budget-wrecking expenditure like this usually Adult education courses are thriving all over the takes plenty of planning and scraping. How nation. many families are struggling right now to send average around $10,000. A Not long ago the “ egghead” was considered a children to college and how many more are put fuzzy bumbler— a comic character who was al ting money aside in anticipation of the struggle? ways misplacing his glasses. Today he is some Certainly some of the shift away from “ hard” thing of a hero, more to be emulated than goods is being forced by saving and spending snickered at. We wonder how many people now be for college. And since birth rates have remained come scholars, artists, musicians, and scientists at high levels through the postwar period, edu in their “ Walter Mitty” cation will be a big item in consumer budgets dreams rather than athletic heroes, sea captains, and soldiers of for the foreseeable future. fortune. A large part of the new interest in culture THE NEW ISOLATIONISM probably is genuine. People truly have become We don’t hear much about political isolationism more intellectual. Many have a better apprecia these days. With distances shortened as the mis tion of art, music, and the like than their parents sile flies, it is hardly possible for America did. Here, too, increased income, education, and to snuggle down behind her oceans and ignore leisure are important factors. the rest of the world. 9 business review It is possible, however, for individuals to hide some, and so is our alleged lack of national from the world. Some do it consciously and de prestige and purpose. Although the tendency to liberately— hermits and beatniks— but they are withdraw is not nearly so great here as it is a small minority. Experts say a far larger group of Americans is unconsciously trying to escape certain realities. This is the new isolation ism— a psychological withdrawal from the world. Or perhaps we should say from several worlds. For the individual actually lives in at least four concentric worlds. The first is the international world, the planet, earth. The second is national, the United States. The third is the job world of farm, factory, or office. The fourth world en closes the home and family. Proponents of the new isolationism theory from the international world, many people are claim the first three worlds have become more questions. reluctant to think too much about national and more unsatisfactory to many Americans. The job world also is often less than satisfac Crisis follows crisis in the international world. tory. True, people are working shorter hours As this is written, the morning paper headlines and earning higher pay than ever before but four critical areas— the Congo, Algeria, Cuba, modern jobs can also be dull and stultifying. and Laos. Others such as Berlin and Quemoy The old-time craftsman put in long hours but are smoldering ominously. And what happens he enjoyed variety and creativity and took pride when Red China gets The Bomb? Many people, in his work. Today’s mass production demands however, are past the point of being afraid. The specialists. Workers make small contributions sharp pain of panic has worn into numbness. to giant projects and feel little sense of identity People worried for years and it did no good; with their work. The emphasis is on the team conditions only became more depressing. Re and, as we mentioned earlier, the individual can cently, the theory goes, many citizens have often become frustrated. turned away from the international world and The international, national, and job worlds tried to shut it out of their minds. Readers by are big worlds, driven by big forces. The indi pass front pages and quickly turn to the sports vidual, it is claimed, often feels powerless to do and comics. At social gatherings, conversation anything about them. As a result, many have usually runs to small talk rather than serious tended to isolate themselves psychologically in issues. There are exceptions, of course. The the fourth world of home and family where “ New York Times set” and others are deeply con things are more pleasant and manageable. Pro cerned with international affairs but they are fessor Paul Samuelson of M.I.T. said: “ In the probably in the minority. face of a world grown more dangerous, people’s The national world is also beset with ugly problems— integration, inflation, juvenile crime, unemployment. Gold is a serious concern to 10 attitudes and values seemed to turn inward toward the home.” The new isolationism may play a part in some business review basic sociological trends. Earlier marriages may LINUS’ BLANKET be to some extent an attempt to get more out of Linus is a little boy in the comic strip “ Peanuts.” life in uncertain, frustrating times. Alfred H. Like many small children, he is firmly attached Williams, past president of this Bank, has sug to his blanket. For some reason, the feel of it gested that the high postwar birth rate may be against his cheek gives him a sense of cozy partially due to some “ deep-seated drive to per security. petuate our kind in the face of a daily diet of tension and trouble.” The sharper focus on home and family has Adults outgrow their blankets but not their need for security. It is economic security that concerns us here. The quest for economic secu had its effect on consumer spending. It probably rity seems particularly strong these days. People is a factor in the rapid rise in home ownership. are demanding and, to a large extent, getting The new isolationism is a reason why homes are freedom from poverty. They want assurance of a more important as status symbols and entertain steady income both during their working years ment centers. It also helps to explain why people and after retirement. are spending heavily on furnishings, patios, and yards. This is one of the most natural desires, yet it is criticized by some. They say the price of eco The desire to make the home and family world nomic security runs high, that sometimes one as pleasant as possible extends to the immediate must settle for less chance of gain to minimize community. Possibly as a result of this, there is the chance of loss. The premium on security, it a revival of interest in local affairs. Husbands and wives are said to be more willing to partici is claimed, can lessen ini tiative, ambition, and the pate in community clubs, P.T.A.’s, church work, and local governments. Taking part in commu desire to compete. Secur nity groups carries quite a bit of status and mobility of the labor force prestige in some neighborhoods. as people become chained ity also can reduce the to jobs by seniority and The new isolationism came to flower in the late 1950’s. In the past several months, some of pension rights. A less vig our associates here at the bank claim to have orous, less mobile work force can reduce our sensed a greater public interest in national prob economy’s ability to grow and, in the end, may lems, a greater willingness to face up to the in undermine the very security people seek. It is a ternational ugliness, especially on the part of our gloomy thought but it is only a thought. The youth. If true, this could be the start of a major quest for security has other, more definite effects trend or it could be only a flurry associated with on the enonomy. the recent elections and the change of Admini strations. At any rate, it is not likely that Security-conscious consumers now squirrel away more money for rainy days and retirement the consumer’s concern with home and family and, as a result, spend less for immediate con matters will diminish significantly in the near sumption than they otherwise might. Personal future. The new isolationism is part cause, part effect savings are at record levels and retirement funds of the last factor we shall discuss. Most consumer savings are invested and insofar of all types amount to about 100 billion dollars. 11 business review CONCLUSION as they become available to businesses, they serve to finance economic growth without inflation. We have mentioned only a few of the factors Relatively few consumers invest their savings we feel are influencing consumers. There are directly. Rather they put their money in a finan many more— some run at cross purposes and all cial intermediary, such as a commercial bank, are complex and complicated. The net result mutual savings bank, savings and loan associa could well be that consumer spending patterns tion, or insurance company which does the invest will grow more diverse and over-all demand will ing for them. It’s the desire for safety and se curity again. Savers choose a smaller, surer continue its restless churning. Not that con sumers are becoming more flighty or faddish income over the chance for a greater but riskier but they are enjoying the freedom of intelligent return. choice that goes with affluence, education, and a Financial intermediaries are concerned with degree of satiation with goods. safety, too; they have to be for they are dealing As consumer preferences shift, they often with other people’s money. With huge sums to leave unemployment and excess capacity in their invest, they tend to favor large blocks of “ blue wake. As a result, pockets of chronic unemploy chip” securities. This policy, it has been said, ment may continue to plague the economy. The diverts funds away from venturesome small and solution usually offered to this problem is to new businesses where the investment risk may be increase the mobility of productive resources. greater. Let capital and labor move between companies In their quest for economic security, many or between industries to follow consumer de individuals turn to unions. Many others, however, mand. But this is often easier said than done. turn We have indicated how the desire for security to governments. Governments, particu larly the Federal Government, are in the eco tends to inhibit the mobility of nomic security business in a big way. Pensions, capital. social security, unemployment labor and compensation, Consumers are playing an increasingly active veterans’ benefits, agricultural programs all pro role in determining the course of the economy. vide economic security for large groups. Once consumer spending was linked closely to pro Such benefits never can be manufactured out duction— how much consumers spent largely de of thin air. Their cost is high and, no matter pended on how much they earned by producing how you look at it, the public in general must goods. Consumers were relatively passive, and pay. It could be through contributions or direct fluctuations in production caused the ups and taxes, or through the cruel, hidden tax of infla downs in the economy. Today, however, the tie tion which just as surely and probably more between spending inequitably takes away consumer spending power. loosened considerably by increased savings, the Thus the desire for security has shifted funds to greater availability of credit, the growing im governments that might otherwise be spent by portance of services, and by governmental in consumers. Whether one thinks this is good or come-generating programs. Thus, consumer mar bad depends on his own persuasions and political ket decisions— to buy or not to buy— are, more beliefs. Our point is that it has altered consumer and more, a causative factor in the business cycle. spending patterns. Digitized for12 FRASER and production has been With this additional power in their hands it business review becomes more important to understand the royal mendous sustaining force in the economy during family of consumers and to try to figure out the rest of the year. But their shifting spending what they are going to do. But, as we have at patterns do not seem to contain the ingredients tempted to show, consumers are complex and for explosive growth. In fact, the royal family may psychoanalyzing them is more difficult. As we see it, the royal family will be a tre decree little more than a gently rising economy for several years to come. 13 THE BIG BULL MARKET OF THE 1950’s Stock market news follows the sun across the country into the commuter train on the way hom e from town and into the living room after dinner to be digested with smiles and sometimes tears and discussed in excited or exasperated whispers on the train back to town the next morning mixed with advice on howtomakeafor tune from insiders outsiders relatives friends enemies brokers and other casual acquaintances Probably no institution is more closely identified dering if a serious readjustment was in the offing. with American free enterprise than the stock But before each economic recovery began the market. Concentrated in New York City, its market had already discounted a rosy glow in activities comprehend the entire country and a the minds of investors, rallied, and begun again good part of the world. The stock market, how its mercurial upswing. ever, is more than just another important eco Over the long pull, as can be seen in the ac nomic institution. Its rise and fall have marked companying chart, the economy and the market off eras in American life. The 1950’s have been have moved together. The 1950’s were a period a period of resurrection for the stock market and perhaps, as were the 1920’s, a distinct era in American life. The stock market rose during World War II but then fell somewhat as the war ended. The late 1940’s were characterized by stock price stability, despite the fact that the economy was expanding rapidly and prices were rising. The resurgence really got under way in 1950. In that year, Standard and Poor’s index of 500 stocks rose about 20 per cent. This was the be ginning of the bull market that over the decade of the fifties increased stock prices by more than 275 per cent. There were breathers during the stock market ascent, particularly during the recessions of 1953-1954 and 1957-1958. While the market was breathing, skeptics held their breath won 14 OVER THE LONG PULL Since 1929 the stock market and gross national product have generally moved together. In the 1940’s the market, by comparison, rose somewhat sluggishly. But in the 1950’s stock prices began to increase very rapidly; by the middle of the decade the market had made up all the ground it had lost in the forties; and by the end of the decade, its growth over the previous 20 years, had exceeded that of gross national product. INDEX 1941-1943 = 10 BILLIONS OF DOLLARS business review of economic advance for corporations as well have cash will frequently desire to convert it as the economy, and the stock market fully re into the outstanding securities of a going con flected this and then some. cern. The market facilitates the exchange of As the decade wore on, people seemed to be cash for securities; and because exchange can come more aware of the market and of the possi be managed so easily investors get a feeling of bilities for making money by investing in stock. liquidity, and are encouraged to save and invest. The market apparently became more important The market’s chief function seems to be the to more people, to their personal prosperity, and encouragement of investment by facilitating dis perhaps to the prosperity of the economy. For it is investment. possible that during this period the market be The market also allocates savings into prom came more than merely a mirror of current and ising issues. A firm with good prospects would expected economic conditions. Conceivably, it find its stock rising and would therefore find it was also helping to determine what was coming. easier to raise funds by selling new stock. In this The stock market depends on the state of the way the market may help to allocate capital to economy, and the state of the economy depends firms whose products are in great demand. in part, perhaps, on the stock market. There is Some have credited the market with an addi an old saying in economics that everything de tional accomplishment— an ability to see around pends on everything else. corners and to catch the turns in economic affairs. THE MARKET’S CONTRIBUTION If you asked ten people at random why they THE MARKET AND THE CYCLE think a stock market exists, the chances are that The belief that the stock market is a good fore eight or nine would tell you “ to permit people caster of general business conditions goes back to make money.” This is something of a mis a long way. Perhaps the classic statement was conception. made by S. S. Huebner in 1922. “ Without ex The history of security trading goes back to ception,” Mr. Huebner asserted, “ every major Colonial days in the United States. The history business depression or boom in this country has of an organized market goes back to about 1792. been discounted by our security markets from In that year, brokers who were conducting busi six months to two years before the dull times or ness on the lower end of Manhattan Island the prosperity became a reality.” * reached an agreement to conduct their business More recent studies have indeed confirmed in certain specified ways. From this beginning, the fact that stock prices generally turn down the New York Stock Exchange developed. before recessions and up before recoveries, but The market arose to fill a need. It was a place the relationship has not been so consistent as where buyers and sellers of outstanding securities many once thought. The current belief is that could meet and exchange securities for money, stock market prices frequently lead business con and money for securities. The market operates ditions and are useful, along with other informa to fill the same need today. It exists because tion, in anticipating the course of the economy; owners of securities sometimes desire to trade but in and of themselves, stock prices present these securities for cash, and because people who * S. S. Huebner, The Slock Market, 1922, pp. 36-37. 15 business review some difficulties to the would-be forecaster. They Perhaps the most widely discussed explanation do not invariably lead business conditions and of why the stock market leads general business consequently they may at times signal changes conditions over the cycle is based on a concep that never come about, and fail to signal changes tion of the market “ as the pivotal center where that are imminent. In addition, when they do lead thousands of the leading minds of the world business conditions the time of their lead may [act] on judgments that [have] reference to the vary considerably. It has been found that stock future, not the present.” Since these “ leading market prices have run as far as 21 months ahead of the business cycle. This makes short closely and frequently have access to inside minds” generally watch business conditions very term forecasting on the basis of the stock market information, it was reasoned that their collec alone a bit hazardous. tive judgments, as reflected in the stock market, During the 1950’s, however, the market was a actually discounted the future and accurately pretty good signal of coming events. Each re forecasted economic change. “ It is only natural, cession, including the current slowdown, and therefore, that the rank and file should regard each recovery was foreshadowed one quarter to the stock market as a most incomprehensible four quarters in advance by the stock market. affair, always going contrary to what is so per In all, there were five cyclical turning points in fectly evident at the time.” * gross national product and all five were preceded While this explanation does not seem un by cyclical turning points in the stock market. reasonable on the surface, it implies much about (It is, of course, easier to see the turns looking the modern-day stock market that has not been back on the data than looking ahead; short-term really proved. It suggests that the cyclical mar fluctuations frequently obscure turning points ket movement is largely determined by sophisti for a considerable period of time.) cated traders who are interested primarily in THE STOCK MARKET— A LEADING INDICATOR short-term gains rather than long-term growth. During the 1950’s, turns in the stock market have generally led cyclical turning points— the peaks (P ’s) tnd troughs ( T ’s ) — in gross national product. In the last half of 1959, a drop in the market antici pated the decline in economic activity in mid-1960. INDEX 1941-1943=10 BILLIONS OF DOLLARS Some traders may move in and out of the market at the drop of a tip about corporate earnings in the next quarter. Some may try to outguess the market by anticipating the reactions of rank-andfile investors to the business news that accom panies ups and downs in the economy. “ The . . . object of the most skilled investment today,” said Lord Keynes in the mid-1930’s, “ is ‘to beat the gun’ . . . , to outwit the crowd, and to pass the bad or depreciating half-crown to the other fellow.” f Of course, once the “ rank and file” get wind of an impending change, they are likely to em phasize it by their own buying or selling. But it is also possible that a turn in the market may * Quarterly average of monthly data. 16 * Both quotations are from Huebner, The Stock Market, pp. 37, 39. f John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936, p. 155. business review not only discount the future, but help to shape it. consumer attitudes might have become increas For a turn in the market does have some signifi ingly close in the latter years of the decade. cance for the people whose spending largely In fact, consumer attitudes and the stock determines the level of economic activity— con market do seem to have a good deal in common. sumers and businessmen. As can be seen on the following charts, both stock prices and attitudes led the major upturns and W hat the market means to the consumer downturns of the economy during the 1950’s. Between 1952 and 1959 the number of individu And stock prices appear to have led attitudes in als owning stock almost doubled. The records the recession and recovery of 1957-1958. More of the New York Stock Exchange show that over, the cyclical movements of the stock market stock market trading increased and spread out and the cyclical changes in consumer attitudes over the country. In these years, when the fi appear to have moved more closely together as nancial assets of consumers were rising rapidly, the decade wore on. corporate stock became the most important asset in the consumer’s portfolio.* Of course, consumer attitudes are, in and of themselves, interesting; but are they crucial to Some of the awakening interest in the stock consumer spending ? Some, but far from all, < market can no doubt be traced to a rising level strongly believe that they are— that consumer of income in the 1950’s. During these years, it feelings of optimism or pessimism significantly was typical for about two-thirds of all stock own influence consumer spending for “ big ticket” ers to have incomes of at least $5,000 a year. Over the decade, the number of families and in items such as automobiles, refrigerators, and washing machines. dividuals making at least that amount moved The available evidence by no means proves up from about one-quarter to over one-half of that the stock market strongly influences con the population. sumer spending. But it does suggest that in the Continual reports on the progress of the bull 1950’s, there was some relationship between the market also did their share in attracting public stock market and the way an increasing number attention. Stock market news was available daily of consumers viewed the world around them. to everyone who read a newspaper, watched tele vision, or listened to radio. Closely following the What the market means to business closing averages were, probably, a large propor The market value of a firm’s outstanding stock tion of all who owned stock and all who were is one measure of the cost of capital to the firm. thinking of purchasing. The ups and downs of When a company’s stock is rising, it often be the market may well have been the single most comes more advantageous and less costly to widely disseminated bit of business information. tap the rising market for needed funds. One would think, therefore, that the stock During the 1950’s, while the stock market was market and consumer feelings of optimism or advancing, yields on corporate bonds were mov pessimism would frequently be closely related; ing up also. Stock financing was becoming less and that the relationship between the market and expensive and bond financing more expensive. * See "The Public's Portfolio" in the Business Review for October I960. tions have increased their use of equity financ In the past, when this has happened, corpora 17 business review ing relative to bond financing. The years 1928 1950’s is not so apparent. While new stock and 1929 are striking examples. In 1928 and issues increased over the period, the ratio of new 1929 stock prices rose rapidly and corporate stock issues to total security issues showed no bond yields moved up also; the ratio of new persistent upward trend. stock issues to total security issues increased Many observers have pointed out that the from .24 in 1927 to .46 in 1928 and .69 in 1929. corporate income tax today creates a bias against The influence of similar conditions in the equity financing. The earnings of a company and MARKET-SENTIMENT Consumer feeling of optimism and pessimism, along with stock market prices, typically move in advance of general business conditions. While turning points are not completely clear, the stock market probably moved in advance of consumer attitudes in the reces sion and recovery of 1 9 5 7 -1 9 5 8 ; and, discounting consumer pessimism during the steel strike, moved in advance of attitudes in the most recent downturn in economic activity. INDEX its owners are taxable, but interest payable on bonds is tax deductible. The tax situation may clearly throw the weight of profitability to bond rather than stock financing— despite changes in market yields and prices. Nevertheless, there is some evidence that sug gests corporations did respond to changing market yields and stock prices during the 1950’s. In the years of 1947, 1948, and 1949, both stock prices and bond yields were relatively stable. The ratio of new stock issues to security issues averaged .19. During the general upswing in stock prices and bond yields of the 1950’s, the ratio averaged .23. And, during the past decade, if we take only the years in which both stock prices and bond yields were rising, we find an average ratio of .26. It seems clear that firms did, at propitious moments, substitute stock financing for bond financing in order to avail themselves of lower costs. f Source: Survey Research Center, University of M ichigan (Proceed ings of the American Statistical Association, I960); N ovem berDecember 1952 = 100. Growing optimism is shown by a rising index of attitudes; pessimism by a falling index. Shaded areas cover reference dates for recessions established by the National Bureau of Economic Research. costs of financing deter corporate spending for Since 1953, cyclical movements in the stock mar ket and consumer attitudes have been fairly close — especially in recent years. also seems reasonable, then, that a rising stock INDEX No one is sure of the extent to which high new plant and equipment. But it seems reason able to believe that to some extent they do. It market during the 1950’s encouraged some cor porate spending that otherwise might not have taken place. Moreover, in each recession of the fifties, the stock market began rising while the rest of the economy was still slumping. A leading stock market would seem favorable to both cor porate spending and economic recovery. * Cyclical residuals of trend fitted to Standard and Poor's 500 stock index for years 1952-1959. 4th quarter 1952 = 100. f N ovem ber-Decem ber 1952 = 100. 18 The direction of the market, it appears, means business review something to both consumers and business. Per ing the fifties— and perhaps more of them— haps sophisticated traders do discount the future when the economy could have done with a little accurately in trading stocks and money; but if less spending. their trading is strong enough to change the The inflation of the fifties and the stock direction of the market, they would seem to set market were wrapped up with one another. in motion forces that tend to confirm their be While the rising market probably stimulated liefs. Other investors may follow their lead and spending, it also reflected, in part, the desire of so may business and consumer spending. many to hedge against rising consumer prices. Stock purchases, made in the hope that stock THE MARKET AND THE ECONOMY— Q UO VADIS values would rise faster than the price level, helped drive the market up; but they also Neither the business cycle nor economic growth created a dangerous situation. Experience has can be traced directly to the stock market. The shown us that people will not indefinitely pur strongest forces probably operate in the other chase stocks at prices that give them little or no direction, with the market reflecting changes in income now and really promise little or no the level of economic activity. But it would prob income in the foreseeable future. If the market ably be just as much of a mistake to assume that rises beyond reason, it must fall when reason re the stock market has no influence at all on busi turns. And sooner or later, reason does return. All ness conditions. of the people will not discount the hereafter all of Contrary to the beliefs of many, the Great Depression of the 1930’s was not initiated by the the time. As to the course of the market and the economy stock market crash in 1929— the depression be in the decade we have now entered, no one is gan well before those bleak days in late October of course certain. In the past few months, and reflected underlying structural weaknesses the market has shown considerable strength. in the economy. But the ragged course of the Observers have wondered if it were not signal economy in the years that followed was cer ing— and, we would add, perhaps helping to tainly influenced by the crash. To paraphrase a shape— the future course of the economy. recent commentator: when a house, however Despite its recent show of strength, however, fragile, succumbs in a storm, some of the blame many are predicting that the market will not is usually placed on the storm; one must accord repeat its rapid ascent of the 1950’s in the some significance to the typhoon which blew 1960’s. They seem to believe that the current out of lower Manhattan in 1929. high price-earnings ratios and a more stable Similarly one must accord some significance to the balmy breezes that blew out of lower consumer price level may prove a barrier to the continuation of the bull market. 1950’s. They made many Forecasting the stock market is difficult enough people feel good and probably encouraged many a month or a year in advance, much less a to spend. In some ways this was good. For there were decade. But if the forecasters are right in their times during the fifties when a fillip to spending is clear. Some of the intoxication of the fifties was desirable. But there were other times dur will be missing in the so far so-so soaring sixties. Manhattan in the anticipations, the implication for the economy 19 F O R TH E R E C O R D . . . INDEX y B U S IN E S S y w FACTOR Y PAYROLLS, DIST. 1 (1949 = N X FACTORY 1 MPLOYMENT, DIST. (1949= 100) ________ ^ 100« 1 140- DEPARTMENT STORE SALES, DIST. 1 As \ U M U a vv -A/ v \Vv ^ CONSUMER PRICES, PHIIA. 13 0 t 2 YEARS AGO YEAR AGO DEC.' I9 6 0 Third Federal Reserve District United States Per cent change Per cent change SU M M A RY Dec. I960 from mo. ago year ago 12 mos. I960 from year ago Dec. I960 from mo. ago year ago 12 mos. I960 from year ago EM PLO YM ENT A N D IN C O M E Factory employment (Total) ....................... Factory wage incom e..... — 10 -2 0 - 7 LO CA L CH A N G ES Payrolls Sales Stocks Per cent change Dec. I960 from Per cent change Dec. I960 from Per cent change Dec. I960 from Per cent change Dec. I960 from — 2 - 9 B A N K IN G (All member banks) Deposits ...................... + 3 Loans .......................... + 1 Investments .................. + 3 U.S. Govt, securities..... + 3 Other ......................... + 2 Check payments ........... + 6f — 4 -1 2 - - 5 — 6 - 3 - 6 +22 -1 6 + 3 0 0 year mo. ago ago year mo. ago ago year mo. ago ago year ago 0 — 5 — 1 — 6 — 2 0 + 4 — 1 — 4 + 1 + 4 Lancaster .... + + 2 — 5 - 6 - Philadelphia . - + 1 + 2 3 0 Lehigh Valley — 2 — 2 — 6 — 8 2 - 9 - II Reading ..... 0 — 4 - 6 1 3 - 5 - + 5 0 + 7 + 4 - - 1 Scranton ..... — 1 - 1 - 5 - 4 — 9 1 — 1 + 5 - 7 2 5 — 10 + 12 + 1 - 3 — 5 0 - 1 — 5 2 + 2 — 3 + 1 — 4 2 1 1 5 7 1 4f If + 2f |20 Cities + + + + + + 3 3 2 2 3 9 + + + + + - 3 5 4 5 2 2 + + — — + 1 8 7 9 3 6 2 + 0 0 + 1 + 2 + 0 2 ^Philadelphia -1 0 8 - + Trenton ....... - 5 -1 6 1 0 - Wilkes-Barre . - 3 - 5 - 3 - 5 + 2 - 3 — 1 -1 2 W ilm ington .. - 1 + 2 - 1 + 5 0 - 4 + 2 + 2 +28 1 - 8 - 9 1 - -2 3 + York ........... - + + — + + 5 + 9 + 2 + 2 + 1 -4 f Of + •Adjusted for seasonal variation. - 2 — 10 — 4 year mo. ago ago Per cent change Dec. I960 from Harrisburg ... — 4 — 9 — 8 — 19 TRADE* Department store sales ... 0 Department store stocks .. — 1 P R IC E S Wholesale ..................... Consumer ..................... -1 5 — 17 -2 8 v^neck Payments Employ ment mo. ago OUTPUT Manufacturing production. Construction contracts ... Coal mining ................ Department Storef Factory* - 8 + 4 + 2 + 4 — 4 + 4 + 4 + 5 + + 5 6 3 -1 4 *N ot restricted to corporate limits of cities but covers areas of one or more counties, f Adjusted for seasonal variation.
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