New hope for the economy has given the stock market its best July in 20 years.
Investors placed big bets over the last month that the profit machine at U.S. companies would continue to rev higher and that the longest recession since World War II was finally easing its grip.
The Dow Jones industrial average surged 725 points, or 8.6% for the month, with most of the gains arriving in bursts in the final 15 days. The extraordinary run shaped July into the best month for the blue chips since October 2002 and the best July since 1989. The Dow has risen four of the last five months.
The broader Standard & Poor's 500 index, a benchmark for many mutual funds, also ran at a strong pace -- and July was its best performance since 1997. Even with the gains, the S&P; is still down 37% from its peak in October 2007.
The companies that fared best in July were those that signaled they were patching up their businesses after a terrible winter and fall. Caterpillar's earnings for the April-June quarter fell but the company raised its profit forecast for the year. Its stock surged 33.4% for the month.
Economic reports are starting to support traders' bets. The government reported Friday that the gross domestic product shrank at a pace of just 1% in the second quarter, better than analysts anticipated. In the first three months of the year, the economy shrank at a pace of 6.4%, the steepest slide in nearly 30 years.
On Friday, the Dow rose a modest 17.15, or 0.2%, to 9,171.61. The S&P; 500 rose 0.73, or 0.1%, to 987.48, while the Nasdaq composite index slipped 5.80, or 0.3%, to 1,978.50.
On July 23, the Dow rose above 9,000 for the first time since January. The rally pushed the Dow back into the black for the year and it is now up 4.5%. The Nasdaq traded above 2,000 and the S&P; 500 index neared the 1,000 mark, a level not seen since November.
"We're on the edge between recovery and speculation," said Rick Lake, of Aston/Lake Partners LASSO Alternatives Fund in Greenwich, Conn.
Lake said the market's ability to bounce higher in July even after getting bad news signaled that many investors were looking to jump on the rally.
Analysts credit some of the buying to short-covering, in which investors have to buy stock after having earlier sold borrowed shares in a bet that they would fall. That can make doubters into buyers and give an artificial lift to stocks.
In other market highlights Friday:
* Bond prices rose. The yield on the benchmark 10-year Treasury note fell to 3.50% from 3.64% late Thursday.
* Light, sweet crude rose $2.51 to settle at $69.45 a barrel on the New York Mercantile Exchange.
* The Russell 2000 index of smaller companies slipped 1.09, or 0.2%, to 556.71.