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If the market does in fact go on toward its old highs, that could be important news for many Americans besides those who own stock (25 million according to a New York Stock Exchange survey in late 1975, down from 30.9 million in 1970). For the past few years, the market has been performing with great accuracy as a leading indicator of the economy's direction. In late 1973, prices broke calamitously, wiping out some $473.5 billion in stock values over the next year and correctly forecasting the severity of the recession that followed. Then in December 1974, while the economy was plunging toward the bottom of the slump, the market began to turn upward smartly, anticipating the recovery that began last spring. During 1975, prices of shares listed on the New York Stock Exchange rose 38.7%, the second largest increase since World War II, though most of the advance occurred early in the year.
Long Term. Two immediate factors spurred last week's renewed upsurge. One was a firming up of the bond market, where prices have risen and interest yields fallen, making bonds less attractive than stocks to many investors. The other was a one-quarter point cut in the prime bank lending rate to 7% by Cleveland Trust Co., followed a day later by Chase Manhattan. Cheaper credit would spur economic expansion and encourage investors to borrow money to buy shares. But a sustained long-term rally will depend, of course, on the state of the economy.
The current signs are promising. The Federal Reserve Board seems fully committed to expansionary increases in the nation's money supply—a development that economists of the monetarist school believe is essential for a rising stock market. Auto sales in December jumped 39.6% over a year earlier and even exceeded those in the final month of 1973, the industry's record year. The wholesale price index fell .4% in December, indicating a continuing slackening of inflationary pressures, but the nation's troublesomely high unemployment rate remained unchanged at 8.3%.
Improving Indicators. To the indications of an improving economy can now be added the stock market itself. Economists have long debated whether swings in stock prices help to cause recessions and recoveries, as well as signaling them. The general view is that at the very least they have some impact. Among other things, rising stock prices make it easier for companies to raise money, and make millions of people feel richer and more cheerful—an economic factor of no small importance.