$50 Billion Rally

In the six weeks since the turning point of the Cuban crisis, U.S. stock markets have staged the sharpest rally in their history. Prices of the shares listed on the New York Stock Exchange have risen $50 billion. The Dow-Jones industrial index, which closed last week at 652.10, now stands 116 points above its 1962 low and only 83 points short of the alltime high that it hit last December. Why the rally? And how long will it last?

Big Man's Market. The Russian backdown over Cuba was a tonic to the market, and it was followed by a series of surprisingly strong economic indicators suggesting that a recession was not just around the corner, after all. Some Wall Streeters also count heavily on the extra lift that the economy should get from a tax cut next year. They also believe that the Administration's mounting deficits should set off the kind of inflation that boosts stock prices (because investors then move heavily into common stocks to protect their depreciating dollars).

So far, the heavy buying has come almost entirely from professional traders on the stock-market floor and from the insurance companies, pension funds and mutual funds. The small investor, who buys in "odd lots" of fewer than 100 shares, still feels burned from Blue Monday's break; he is dumping some stocks to establish tax losses before the year end and is putting his money into savings deposits, Christmas presents or new cars. In November the rate of odd-lot selling was the highest in 20 years, and the rate of odd-lot buying very low.

Small Man's Power. Wall Street's professionals are putting their money on blue chips that offer plump dividends and have steady growth records. The professionals are particularly high on those oil and aerospace companies whose earnings have been on the rise. They are notably cool toward most onetime "glamour" stocks, including many of the electronics and discounting issues, which fell fast during the market break but are still selling for 20 or more times earnings. The conservatives like to stick with issues closer to 15 times earnings.

Few Wall Street professionals expect the market as a whole to keep going up as sharply as it has in recent weeks. Some predict a fall-off in prices, because stocks in the Dow-Jones industrial index are now up to an average of 18 times earnings. Others argue that the effect of any tax cut has already been taken into account by investors, and point ominously to last week's Commerce Department report that capital spending, now running at a record annual rate of $38.4 billion, is likely to decline slightly in next year's first quarter.

The bears' calculations, however, could be upset by one unpredictable factor. The public's pocketbook is bulging with record savings. In the past, rising stock prices and the suggestion of easy profits have brought small investors back into the market. If that should happen within the next few weeks, the outlook for the market would be bullish indeed.

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