Optimism returns to markets
Prospects for 2006 and hopes for steady interest rates pushed the Dow above 11,000 Monday.
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In his view, the Fed's actions will come at a time when he expects the economy to grow at a respectable 3.4 percent. Core inflation - the inflation rate without food or energy prices included - will rise 2 percent compared with last year.Skip to next paragraph
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Energy prices, which have been a worry on Wall Street all year, are back up, with oil selling at close to $64 a barrel. But this time, investors appear to be a little less concerned, even though high energy prices act as a tax on consumers.
"We are at the point in the economic cycle where business investment is more important than consumption, and business is feeling good about itself and the economy," says Bob McIntosh, chief economist at Eaton Vance, a Boston-based mutual fund company.
This optimistic view of the economy comes at a time of the year when the stock market has historically gotten a lift, something investors term the "January effect." Many bonds pay interest in January and June, giving investors extra money. Professional investors reassess their portfolios and make changes. This year, there are several trillion dollars in money-market accounts - funds that are available to be moved into the stock market.
In addition, the stock market faces less competition from the bond market. Long-term yields are so low that the dividend on some stocks is higher than the yield on the 10-year Treasury bill. "The six-month and 10-year bonds have the same yield, which makes equities the asset class of choice," says Young.
Even though the stock market has improved, the atmosphere has not reached the levels of the late 1990s, when many Americans were checking their accounts each day.
On Monday, at Grand Central Terminal in New York, a variety of individuals said that the rising stock market, while good, did not particularly affect them. "I don't work in finance and don't have a lot of investments in stocks," said Jim Locovare of Larchmont, N.Y. "Our house is absolutely our most important investment."
Even those who do invest in the market are not overly exuberant. One of those is Ann Brown, a real estate agent from Scarsdale, N.Y. She says she and her husband are happy that the market is rising since they invest their profits from buying and selling homes in the stock market. But, real estate "has been better than investing in stocks," she adds. "It never went down."
Investors rode a wave of enthusiasm generated last week after the Federal Reserve signaled it would soon stop raising interest rates - pushing the Dow Jones Industrial Average above the 11,000 mark Monday. Below is a recent history of Dow performance.
• Five-year low: The Dow stood at 7,286 on Oct. 9, 2002. It has gained about 50 percent since then.
• All-time high: The Dow hit 11,723 on Jan. 14, 2000. As of Monday, it was 6.1 percent below that peak.
• This year: The Dow is up 294 points, or 2.8 percent.
Source: The Associated Press
• Alyssa Work in New York contributed to this article.