The stock market again caught fire last week as evidence mounted that the economy remains in terrific shape. Investors, after a bout of selling in prior weeks, concluded that the inflation-fighting Federal Reserve will have no case for raising interest rates soon.
The Dow Jones industrial average, after racking up its biggest point gain in history Tuesday (up 257 points), closed the week at 7,822.41. The Nasdaq Composite Index of small stocks ended the week at a record high of 1,635.77, and the Standard & Poor's 500 index closed at 929.05, up 29.58 for the week.
Positive news included a report by the nation's purchasing managers that manufacturing activity slowed more than expected in August. The group's closely watched price index was barely changed, which was also upbeat.
The government Friday reassured investors that the economy was not overheating as it reported the economy created a moderate number of jobs last month, and the unemployment rate rose to 4.9 percent from 4.8 percent.
So when the Fed's policy-setting committee meets next on Sept. 30, analysts now expect it to hold the line on short-term interest rates that affect car loans to house mortgages.
But in the meantime, the markets will be watching for further signs of a slowing economy and tame inflation. This week, key signals will come in Friday's reports on retail sales and wholesale prices for August.
Experts say high volatility is a new phenomenon that Wall Street will have to learn to live with.
The flood of money into mutual funds has expanded the size of the market, and the sheer volume causes bigger price changes when managers react to news. This year, the Dow rises or falls by 1 percent or more on roughly 3 in 10 trading days - a level not seen since 1990.
Many analysts are uncomfortable with the choppy market, and they view the extreme swings as a sign that stocks are at a major turning point.
"The investment arena is being dominated by short-term-oriented traders who leap at every shadow, whether to sell or to buy," says Michael Metz, chief strategist at Oppenheimer & Co. "To me, it smells of a market that is topping out rather than one that is healthy and preparing for another move upward."
He says the market may be unprepared for unpleasant surprises.
With the economy operating near capacity and the jobless rate below 5 percent - the supposed full-employment level - the stock market's near-term direction could hinge on monthly economic reports.