WHAT MAKES THE STOCK MARKET GO UP--AND DOWN

Managers of mutual funds and, to a lesser degree, pension funds are operating so exuberantly that in this year's first month volume rose 62% on the American Stock Exchange and went up 20% on the New York Stock Exchange. Trouble is, the exchanges and the back offices of brokerage firms have not expanded and automated fast enough to keep up with the increase. In the resulting snarl of tape and paper, countless buyers have either received the wrong confirmation slips and stock certificates or failed to receive any at all. As they struggle to straighten out the mess, brokers earning upward of $50,000 a year have had to spend as much time doing the work of $80-a-week stock clerks as they do studying the stocks they sell so profitably. For the past two weeks, the market has had to close early to give brokers a chance to restore some order.

The root problem is that the market is still locked to the 18th century practice of shuffling millions of paper stock certificates back and forth among investors. What market managers need, and are trying to achieve, is a completely automated system that would do away with the fancy certificates but record the transactions of every investor on a master file, like deposits and withdrawals in bank accounts.

Inevitably, the upsurge in trading has led to some sharprises, often followed by precipitous falls, in the shares of relatively small companies that have more promise than profit. But there is no doubt that most institutions have earned much more than they would have if they had invested only in bonds or blue-chip stocks. Last year one-third of the nation's major mutual funds gained 33% or more, and several rose better than 100%.

During the past year, of course, it took bad judgment, bad timing and bad luck to lose money in the market. The Dow-Jones industrial average of 30 basic blue chips rose 15% in 1967, but the Dow is much too narrow a gauge. Outmoded and inadequate, it does not come close to measuring the total market or its most dynamic companies, even though it has an exaggerated influence over the market's mood. It closed last week at 864—just about where it was three years ago. The better, broader Standard & Poor index of 500 of the 1,255 common stocks on the New York Exchange rose 20% last year, and even that figure tells only a modest part of the story. Shares on the American Exchange jumped 82% in 1967, and the Standard & Poor average of 20 low-priced issues climbed 87%. While few experts expect such phenomenal growth to continue, in an expansive economy the long-term trend remains bullish.

How They Pick Them

As they search for promising shares, the professionals look above all for corporate profits—but there has been a change in the kind of profits that they seek. Today's stock analysts are much less interested in past or even present profits than the potential for future growth. Many are largely uninterested in a company's physical assets because some of the best earnings gainers, especially in service industries, have little in the way of property or machines.