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Wall St. has high hopes for October

Times Staff Writer

October looks to be Stocktober on Wall Street, as the month that roared in like a lion appears to be heading out that way as well.

On Oct. 3, the Dow Jones industrial average finally topped its previous peak, hit nearly seven years ago. Then last week, the index cracked the 12,000 barrier for the first time.

On Monday, the Dow bulled ahead to post a triple-digit gain, fueled by expectations that the Federal Reserve would hold interest rates steady at its two-day meeting that begins today.

Another drop in oil prices, moves to boost profit at Wal-Mart Stores and continued good news on the corporate earnings front also encouraged the market’s advance.

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October has been the scene of some of Wall Street’s biggest retreats -- the 1929 and 1987 crashes both happened in the month -- but some Wall Streeters say there is good reason to think the rally will continue in the days ahead.

By pushing past 12,000 last week, the Dow helped trigger a new wave of stock buying as traders bet the market would move higher.

“Psychologically, the market struggles with round numbers, but once it breaks them you can go even higher,” said Jim Paulsen, chief investment strategist at Wells Capital Management.

The Dow advanced 114.54 points, or 1%, to 12,116.91. The Standard & Poor’s 500 index gained 8.42 points, or 0.6%, to 1,377.02 and the Nasdaq moved up 13.26 points, or 0.6%, to 2,355.56.

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On the year, the Dow is up 13%. The S&P; 500 is ahead 10% and the technology-dominated Nasdaq has climbed 7%.

One of the key factors in Monday’s advance was widespread sentiment that the Fed would keep its benchmark overnight lending rate steady at 5.25%. Despite evidence that the economy is stronger than many people thought just a month ago, experts doubt the Fed will raise rates in the face of the weakened housing market.

That is leading some to predict a return of the fabled “Goldilocks” economy that is neither too hot nor too cold. In that scenario, forceful economic growth propels stocks but doesn’t spark inflation that would compel the Fed to act.

Naysayers discount that idea and say the Fed is likely to resume rate tightening by early next year.

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But at the moment, “the market is walking the fine line that the economy will be decent but not so strong as to raise concerns on inflation,” said Brett Gallagher, co-head of global equities at Julius Baer Investment Management in New York.

Robust corporate profits are adding to Wall Street’s buoyant mood. With almost a third of S&P; 500 companies having reported their results, third-quarter corporate earnings are again coming in much stronger than expected, according to data from Zaks Investment Research.

Median earnings growth is up almost 11% and positive earnings surprises have topped negative ones by 5 to 1.

Profits “thus far have been undeniably positive,” Dirk Van Dijk, Zaks research director, wrote in a market commentary.

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Market bears have repeatedly predicted that earnings would falter, but stocks have consistently rallied as skeptics have been proved wrong.

“We’ve had 13 straight quarters of double-digit profit growth, and for probably the last 10 quarters, profits were expected to peak,” Paulsen said.

The optimism of stock investors is reflected in the recent performance of small-capitalization stocks. Though the revival of long-neglected large caps has garnered all the headlines recently, small caps have quietly outperformed in the last two months.

After trailing small caps almost continuously since 1999, large caps outperformed from May 5 through Aug. 18, Gallagher said. However, small caps have enjoyed a small edge since then, he said.

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Because small caps tend to do better amid vibrant growth, the outperformance indicates that many on Wall Street believe that the economy’s strength is sustainable.

“The Dow has made new highs, but that doesn’t mean the small caps haven’t done really well in the same time period,” Paulsen said.

The Russell 2000 index of smaller company stocks climbed 1.39 points, or 0.2%, to 763.52 on Monday. Like the Dow, the Russell 2,000 is up 13% on the year.

In other market highlights:

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* Oil prices dropped as traders bet that OPEC won’t be able to make a production cut stick. Crude oil futures slipped 52 cents to $58.81 a barrel in New York trading.

* Wal-Mart, one of the 30 Dow stocks, surged higher after the company announced that it was scaling back capital spending and new-store openings to boost profit. Wal-Mart rose $1.91, or 3.9%, to $51.28.

Other retailers advanced amid optimism that a strong economy and stable fuel prices would boost consumer spending. Target climbed $1.72 to $59.72 and Costco picked up $1 to $52.69. Best Buy gained 28 cents to $55.46.

* Google, king of the Internet search engines, surged $21.11 to $480.78, a new high, after a series of analyst upgrades Friday.

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* GM rose $1.85 to $35.19, a 52-week high, reflecting optimism over the automaker’s earnings report due Wednesday.

* Yields on 10-year U.S. Treasury notes rose to 4.83%, from 4.79% on Friday, in light trading ahead of the Fed meeting. Bond traders are concerned that the Fed may issue a stern warning on inflation, Reuters reported.

*

walter.hamilton@latimes.com

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