Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-02-15
NJ MARKET
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RY KENNETH 5. VAN sTRUM.

NEW YORK, February 15.-It is
widely recognized that the stock market
forecasts future business conditions. If
business activity were to continue to
expand indefinitely in the future 1t
would be practically impossible for the
stock market to enter into a broad de-
cline. But since many business men
have expressed their doubts as to the
extent of the present expansion IN busi-
ness, it is important from an invest
ment point of view to estimate the
probable peak in the current phase
business expansion.
Many theories of the relationship be-
tween business activity and stocks have
been worked out. Some OF the most
useful are based on the assumption that
business expansion tends to overreach
itself and that the point is finally
reached where past experience has
shown that the expansion cannot con-
tinue until a temporary REIMBURSEMENT
has taken place. During this period
general business would be less active
and the trend of stock prices would
turn temporarily downward.
Iron and Steel BarOmcters.
In order to get figures which will tell
the degree of business activity 1t Is GUS
toYnary to use iron and steel production.
These commodities are so widely used
that they are considered typical OF gen.
eraI business conditions.
One theory uses figures showing the
percentage of pig iron furnaces in blast.
It is maintained that a normal condi-
ton is indicated when 60 per cent OF
the total number Of pig furnaces IN
the country are in operation. If busi-
ness continued at this level, state OF
equilibrium would be maintained and
business would only increase as tast as
the country grew.
This is not the situation, however,
for the percentage of furnaces IN blast
fiuctuates widely above and below the
60 per cent normal level. The theory
then says that when business Is con-
tracing and activity drops below the 60
per cent level, business is not producing
enough goods to meet current needs and
the stock market will soon commence to
rise in anticipation of greater activity
and larger profits in the future. On
the other hand, when activity increases
and passes the go per cent level, ex-
panSion is being carried too far and
stock prices will commence to decline
predicting declining business and lower
profits in the future.
1t Is worth while to note that in jan
uary the percentage rose above so per
cent for the first time since April, 1927
According to the usual Interpretation of
this theory, business activity is expand
ing at such a fast pace that 1t cannot
be maintained permanently. Accord
ing to this theory, therefore, it would
not be unusual to find that the general
level of stock prices would decline tenn
porarily In anticipation of this event.
Future Business.
In recent years there has been q
tendency for the trends of stocks and
business to correspond more closely, due
perhaps to a more general appreciation
of the fact that declining stock prices
mean decreased business activity later
The following table shows the stock
market and business peaks since 1906,
and the lag between the two
Stock Market Business. Lag,
October 1906 October. 1907 IL months
December, 1908. February. 1910 months.
October, 1918 January, 1920. ) months.
March. 1929; May; 1923; months.
February, 1925; April 1926. 3months.
From what happened during this
period one might expect that a recess
sion in business activity would follow
from two to four months after the
general stock market reaches a high
point and declines.
The best opinion seems to be that If
this occurs today, the decline in bust
ness will be temporary, like the recess
sion of 1923 and 1926, rather than a
major depression as in 1921 None of
the dangerous conditions such as In
fiated commodity prices or large inVen-
tories In the hands of business men,
which cause major depression, exist to-
day. The opinion is that even If a
business recession does come 1t will be
temporary like those of recent years,
rather than repetition of the 1921 de-
preston.