Stocks rallied for a second straight session Tuesday after easing wage pressures and stronger-than-expected service sector activity raised prospects that the economy could cool gradually and leave room for the Federal Reserve to lower interest rates next year.
Investors applauded Labor Department figures indicating that wages and benefits increased at a much slower pace in the third quarter than had been estimated. Recent concerns about inflation had eroded hopes that the Federal Reserve would start lowering rates. The central bank has said inflation remains its primary concern.
Meanwhile, a survey by the Institute for Supply Management, a trade group, suggested that activity in the nation's service sector rose at a faster rate in November, giving a further boost to investor sentiment. An index reading of 58.9 was above the 55.5 that had been expected and the 57.1 seen in October.
The service-sector index "was a nice surprise to the upside, but for me the numbers that were more important were the unit labor costs and the productivity number" from the Labor Department, said Scott Wren, senior equity strategist for A.G. Edwards & Sons. "You're not getting as big a kicker off this data as you might have six months ago because the market is pretty fairly valued."
The Dow Jones industrial average rose 47.75 points, or 0.4%, to 12,331.60. A 2.5% increase from Coca-Cola and a 2.3% rise by Walt Disney to a five-year high helped the blue-chip average.
Broader stock indicators also rose. The Standard & Poor's 500 index gained 5.64 points, or 0.4%, to 1,414.76. Earlier in the session, the index hit a six-year high of 1,415.27. The Nasdaq composite index was up 3.99 points, or 0.2%, to 2,452.38.
The Russell 2000 index of smaller companies climbed 1.57 points, or 0.2%, to a new closing high of 797.42. The index earlier crossed the 800 mark Tuesday for the first time, moving as high as 801.01 before retreating.
Bond yields edged higher on the rise in the service sector index, which cast doubt on the notion of an early 2007 interest-rate cut from the Federal Reserve. The yield on the 10-year U.S. Treasury note rose to 4.44%, from 4.43% on Monday.
Crude oil futures were little changed, falling 1 cent to $62.43 a barrel in New York trading.
The Labor Department reported that the cost of wages and benefits per unit of output increased at an annual rate of 2.3% in the third quarter, a hefty drop from the 3.8% rate the agency estimated a month ago. Also, growth in worker productivity slowed to an annual rate of 0.2%, though the increase still topped an earlier estimate that had productivity as unchanged.
"I think more and more we've seen inflation start to roll over," A.G. Edwards' Wren said, noting many investors have been concerned recently that growth would slow too quickly. He believes investors should remain cautious. "It is a little worrisome that more people aren't calling for a recession out there because I hate to see when everyone is thinking the same way."
Wren's call for vigilance came on the 10th anniversary of remarks by Alan Greenspan, then Federal Reserve chairman, in which he famously asked how investors were to know when "irrational exuberance" had unduly escalated asset values.
Christopher Piros, director of investment strategy and portfolio management for Prudential Investments, said valuations were "still quite reasonable" in light of earnings that have held up well. However, he said many investors were downplaying the risk of a pronounced economic slowing.
"I don't see a recession coming," he said, "but I think there is some risk that the slowdown is deeper than some investors have factored in."
In other market highlights:
* Home builder Toll Bros. advanced 96 cents, or 3%, to $32.87 despite posting a sharp drop in profit. Citing signs of stabilization in the housing sector, it raised its forecast for first-quarter home deliveries. Among other builders, KB Home gained 75 cents to $52.17, and Lennar added $1.33 to $53.53.
* Coca-Cola rose $1.17 to $48 after winning praise from several analysts, while bullish comments from Disney sent its stock up 76 cents to a five-year high of $34.20.
* Kroger rose $1.16, or 5.2%, to $23.49 after the supermarket chain posted a 16% increase in its third-quarter profit. The company also said earnings per share for the year would grow 8% to 10%, rather than the 6% to 8% it had forecast.
* Cooper Tire & Rubber rose $1.12, or 8.4%, to $14.46 after a Deutsche Bank analyst upgraded the stock, citing expectations of cost cutting and an improving industry.
* Starbucks climbed $1.09 to $36.84 after UBS analysts raised their recommendation on the world's largest coffee-shop chain to "buy" from "neutral," citing a potential for higher sales.
* Comcast gained $1 to $41.83 after a Prudential Equity analyst said the cable operator might earn 95 cents a share this year, up from a previous estimate of 88 cents.
Bloomberg News and Reuters were used in compiling this report.