Strength in the Clutch

The stock market usually plunges on news of ominous or unsettling events--as it did for the Korean War, the Eisenhower heart attack, the Cuban missile crisis, the Kennedy assassination--and it usually takes days or even weeks to regain its equilibrium. Last week certainly produced enough news to unsettle Wall Street, but this time the market's reaction was different. Despite the Jenkins scandal, the Kremlin overthrow, the Chinese bomb and Labor's victory in Britain, the market dipped for only a few hours, quickly reversed direction, and by week's end had made up practically all its losses.

Dropped Napkins. The market historically drops on bad news because bad news means uncertainty about the future--and uncertainty raises the investor's fears and deprives him of a sound basis for making decisions. Usually it is the small investors who give in to instinct and drive the market down, though the normally calm professionals had a major part in the sell-off after Kennedy's assassination. Last week Wall Street blamed the public for selling again on bad news, but the public also deserved some credit for being a lot more sensible than usual in its appraisal of the situation.

Just as brokers were debating the effects of the Jenkins scandal, the news of the Kremlin upheaval came over the public-address system at the New York Stock Exchange's private luncheon club. Brokers dropped their napkins and scurried to telephone their offices, where orders to sell were already piling up. In the next two hours the Dow-Jones industrial average plunged more than 11 points, to 861, and the highspeed ticker ran up to 27 minutes late. Professionals and the big institutions quickly moved in to shop for bargains, helped the market recoup half its loss by day's end. Next day, despite the news from Peking and London, the small investors came back in and bought so heavily that the market gained 5 points. At week's end the Dow-Jones closed at 873, only 5 points short of the alltime record set the previous week.

Reinforcement. The U.S. investor's refusal to be shaken for long by unforeseen events reflected both his growing sophistication and his broad confidence in the future of the economy. Despite the continuance of local strikes at General Motors and a walkout by workers at American Motors, that optimism was reinforced last week by reports of rising profits, record dividend payments, and the Commerce Department's announcement that the gross national product rose by $8.9 billion in the third quarter to a record annual rate of $627.5 billion.

The increasing talk about inflation also tends to buoy the market, of course. Last week Robert V. Roosa, Under Secretary of the Treasury, told a meeting of the Business Council that he believed the labor settlements in the auto industry had "probably been too big." Most important, the Federal Reserve Board's announcement that industrial production in September rose to 133.9% of the 1957-59 average meant that the U.S. economy had expanded for the 43rd consecutive month.

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