Oct. 30 — The violent reactions in stock prices constituted the outstanding financial development of the present month, and marked the culmination of a period of acute weakness which began in the latter part of September, according to the Guaranty Survey, published by the Guaranty Trust Co.
"But violent as it was," the Survey says, "the recession in stock prices was not so directly related to changes in the general business outlook as might be supposed. As a matter of fact, the security markets for some time have moved almost independently of trade developments.
"Over a long period, of course, prices of stocks and bonds are necessarily related to the prospects of the concerns they represent; and, in so far as other factors have carried values out of proportion to their intrinsic worth, the recent movement must be regarded as a readjustment toward normal levels. But to suppose that the selling wave of the last few weeks was due to adverse developments of corresponding importance in the general business situation would be a fundamental error.
Factors in Stock Trend Upward
"A number of factors combined to produce the unprecedented appreciation in stock prices that brought about the corrective action of the market in recent weeks. One, of course, was the truly fine progress of the nation's leading business concerns, which fully justified a strong upward trend in stock values. But this perfectly normal movement was immensely exaggerated by the changed character of the investing public. To borrow a popular phrase of the day, it may be said that the American people have become 'investment-minded,' partly as a result of the wide buying of Government securities during the war and partly by reason of the wide diffusion of income in the last decade, which has enabled vast numbers of people to enter the investment field on their own account for the first time.
"Thus, the public that has to a considerable extent determined the course of the stock market in the last few years, is a public uninformed as to intelligent procedure in buying and selling securities. It was easily subjected to psychological reactions of an exaggerated sort, buying and selling en masse without any clear understanding of the reasons for doing so. Although there has always been an element of mob psychology in the actions of the investing public, this element has been increased many-fold by the changes of recent years.
Victim of Imagination
"The small investor is, then, to a large extent the victim of his own imagination. His attitude toward the market seems to have been based on the view that there was no limit to the process of increasing earnings, re-investing the funds, and thus, still further increasing earnings. But the country's business concerns obviously cannot go on indefinitely fulfilling the demands of the public imagination. 'Plowing back' earnings is a perfectly sound policy within limits, but business expansion must be kept in relationship to the market for consumers' goods.
"When the realization finally came that prices of many securities were out of all proportion to present and prospective earning power, the reaction was similarly exaggerated, partly for psychological and partly for financial reasons. Not only did the fear of loss impel a rush of liquidation, but the disorder was increased by the fact that innumerable small speculators, unable to supplement their impaired margins, were precipitated into the market as sellers against their own will. Just as the efforts of the public to make the most of the rising prices result in a buying wave that pushes values too high, so the fear of loss forges a reaction that inevitably depresses the prices of stocks below their true worth.
