Economic data send stocks to 17-month highs
Wall Street sent stocks to new 17-month highs Wednesday on fresh signs of subdued inflation and expectations that interest rates would stay low.
Investors were buoyed by assurances from the Federal Reserve that it would continue to keep in place some of the extraordinary measures used to pull the U.S. economy out of the deep recession.
The Dow Jones index of 30 blue-chip stocks rose 47.69 points, or 0.4%, to 10,733.67, the highest since October 2008, to cap a string of small daily gains over the last seven sessions.
The Dow followed a number of broader indexes that have recently hit their best levels since the rally began a year ago.
The market’s advance this month has been relatively slow and steady as investors have focused on a continuous trickle of good economic news, overlooking government debt woes in Europe and concerns about proposals in Congress to overhaul regulation of the financial system.
“While everyone was busy fretting over the headlines, corporate America and the economy were pumping out good numbers,” said Jack Ablin, the chief investment officer at Harris Private Bank in Chicago. “It’s been pretty dramatic.”
The tone now is very different than two months ago when many investors were on edge, largely because of concerns that the Greek government’s debt troubles would trigger a new global credit crisis.
In mid-January, stocks worldwide entered a slump that led some investors to question whether the powerful rebound of 2009 was sustainable.
But since hitting lows Feb. 8, U.S. market indexes have climbed with few interruptions. Most foreign markets also have resurged.
On Wednesday, the Nasdaq composite index rose 11.08 points, or 0.5%, to 2,389.09, its highest since August 2008. The Standard & Poor’s 500 index rose 6.75 points, or 0.6%, to 1,166.21, a 17-month high.
The latest encouraging economic news came Wednesday when Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank’s key short-term interest rate would be kept near zero for the near future. Bernanke was echoing the decision reached at the end of the Federal Open Market Committee’s meeting a day earlier.
The Fed’s year-old policy has helped keep borrowing rates low for home buyers and consumers.
Pessimists question whether the markets would have any staying power without the Fed’s easy credit and the federal government’s stimulus spending.
“I’m fearful of this belief that the economy is growing when a lot of the improvement has been government-induced,” said Peter Boockvar, an equity strategist at Miller Tabak, a New York research firm.
Rock-bottom interest rates have stoked concern about the potential for rising inflation, but the government’s report Wednesday on wholesale prices showed that “core” inflation remained subdued. That rate, excluding food an energy costs, edged up only 0.1% in February. Overall, the producer price index fell 0.6%.
It is this sort of incremental data that have encouraged investors.
“I hear the phrase ‘Goldilocks environment’ because it’s not too hot and not too cold,” said Sam Stovall, chief investment strategist at Standard & Poor’s.
Yet individual investors, by and large, shunned the stock market for most of last year. Chastened by the crash of 2008-09, individuals poured record sums into bond funds last year, leaving the stock market largely to institutional investors.
Last week, however, net cash flows into domestic stock mutual funds reached $1.4 billion, the highest for any week since mid-January, the Investment Company Institute said.
“Fear seems to be dissipating a bit,” said John Wilson, a strategist at Morgan Keegan & Co. in Tennessee. “We’ll begin to see individuals gradually get back into the market, and we all know how much cash is sitting on the sidelines.”
One indication that investors are betting on a sustained U.S. economic recovery: Small-company stocks have led the market this year. That trend often reflects optimism about domestic growth.
The Russell 2,000 index of small-company stocks is up 9.4% this year, three times the blue-chip Dow’s advance.
Wall Street bulls believe they still have momentum on their side in the short run.
“The bad news is that a lot of this economic backdrop is fueled by massive deficit spending,” Ablin said. “Eventually it’s going to subside and turn into a head wind. For now, though, let’s enjoy the breeze.”
nathaniel.popper@
latimes.com
