Inflation strategy keeps stocks moving ahead

If the United States is entering a recession, once again the economic doldrums forgot to leave calling cards along Wall Street. Spurred by some domestic economic surprises and continuing uncertainty over events in Southwest Asia, a "typical inflationary investment situation" prevailed last week, says a stock analyst for the investment firm of Blunt Ellis & Loewi Inc.

Last week's movers and shakers on the Big Board, he says, were the scarcity stocks: gold, silver, oil, natural gas, and other renewable and nonrenewable resources.

Defense stocks also did well.

Calling the week's trading "a real guns- vs.-butter market," Neal Seltzer, an analyst with the Midwest investment firm of William Blair & Co., observes that "a lot of new money was seeking to be the beneficiary of any new defense posture."

At the close of trading Friday afternoon, the Dow Jones industrial average registered an 8.62-point gain for the week, closing at 867.15. Advances on the New York Stock Exchange -- which saw a record 308.69 million shares traded -- outpaced declines, 2,108, to 866, with 210 issues unchanged.

"It was a week in which the market took further international political shocks rather well," says James N. Von Germeten, senior vice-president for trust investments at Chicago's Northern Trust Bank.

Those international political shocks included the movement of more Soviet troops into Afghanistan and the continuing impasse in the US hostage situation in Iran. Moreover, at one point during the week rumors began circulating among investors that the Soviets had crossed the border into Iran -- rumors that proved false.

Meanwhile in Washington, the long-heralded recession may have been put on the back burner awhile longer. Last week the Commerce Department reported that despite record high interest rates, housing starts on a seasonally adjusted basis rose 0.3 percent in December, after falling 14 percent in November. Personal income increased 1.1 percent and consumption rose 2 percent.

Moreover, despite Federal Reserve Board attempts to rein the money supply, the supply of M1 (cash and checking-account balances) for the week ending Jan. 9 fell $700 million, instead of $2 billion as analysts expected. And M2, a broader money-supply indicator, rose $1.1 billion.

Analysts say that because of the continued "inflation psychology" engendered by these developments, investors moved their money into companies with assets in the ground.

This movement came at the expense of consumer-related stocks. Mr. Seltzer points out that generally retail, beverage, cosmetics, fast-food, auto, and similar stocks weakened during the week.

Investors' inflation psychology has also pinched the bond market.

"The interest rate market has tumbled," says John R. Werderits, manager of financial-instrument marketing department at the Chicago Mercantile Exchange.

Mr. Werderits noted that Southwestern Bell Telephone offered an interest rate of 11.4 percent for $450 million in debentures last week. At the end of the first day, only 60 percent of the offer had been purchased, despite what for any Bell System issue was a record-high interest rate.

"Investors don't want to buy long-term instruments. They want to invest to keep up with inflation. A few years ago, long-term interest rates averaged 8 percent. Now they average 11.5 percent. But short-term instruments are now in the neighborhood of 13.5 percent," he says.

The economy's refusal to knuckle under gracefully to anti-inflation efforts does not bode well for the future, one market analyst feels.

"We're squeezing the last ounce of strength out of the economy," he says. "And that spells an even sharper decline later on."

But at least for the stock market, continued strength may be the order of the day.