Stock indexes close at highest levels in 4 years

4:14 PM, Sep 6, 2012   |    comments
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Stocks were powered higher by a powerful one-two punch of better U.S. economic news and the announcement of a bond-buying program by the European Central Bank designed to lower borrowing rates in troubled eurozone countries and stabilize Europe's wobbly finances.

The Standard & Poor's 500 closed up nearly 29 points, or 2%, to 1432, eclipsing its prior cycle high of 1419.04 it notched on April 2. The benchmark index, which is home to America's largest companies and represents roughly 70% of the stock market's total value, is now trading at levels last seen in January 2008.

The S&P 500 is now trading at its highest level since Barack Obama became president on Jan. 20, 2009.

Also hitting a new 2012 peak was the Dow Jones industrial average. The blue chip gauge gained 244 points to 13,292, topping its May 1 high of 13,279.32 and rising to levels last seen in December 2007.

The technology-packed Nasdaq composite also hit a fresh bull market high, closing out at 3136, and taking out its March 2012 high. The Nasdaq is trading at its highest level since November 2000.

Perhaps the greatest significance to the market's continuing comeback is that it shows its resilience, says Mark Luschini, chief investment strategist at Janney Montgomery Scott.
Taking out the old 2012 highs will provide a psychological boost, he adds.

"It's evidence that the recovery in the economy, which many investors don't think has occurred fully, is real and stocks reflect it," Luschini says. "It might also spark an interest from investors that have been wary of stocks. Hitting a post-crisis high is a tangible demonstration that the market is resilient, that it came back, that investments recover even from brutal declines, and that a patient investor can make money in stocks."

The S&P 500, of course, is still chasing its October 2007 all-time closing high of 1565.15. So is the Dow, which remains nearly 900 points below its record high of 14,164.53.
Still, analysts say the market has a lot to prove if investors, who have lived through the technology-stock bust of 2000 and the Great Recession of 2008-09, are to truly believe in the rally.

"For the rally to be sustainable," says Rex Macey, chief investment officer at Wilmington Trust, "we need to get more good information, data and news."

Macey, however, acknowledges that the ECB move paved the way for stocks to move higher because it removes a lot of the uncertainty and fear that was priced into the market.

"It takes out a lot of the fear factor," says Macey.

Todd Salamone, director of research at Schaeffer's Investment Research, however, says there are some key reasons stocks can continue to push higher.

Many professional investors, he says, have either been betting against the market or are trailing their performance benchmarks, and may have to jump in the market in an effort to chase performance. The bullish combination of the Federal Reserve and ECB supporting markets, coupled with better economic data, may also push investors into stocks.

"It's all about liquidity and there is certainly enough liquidity on the sidelines to fuel a rally," says Salamone.

Doug Cote, chief market strategist at ING Investment Management, says the stock market rally has legs. He argues that investors had been overly bearish ahead of the ECB announcement. The plan detailed by ECB chief Mario Draghi backs up his July assertion that he will do whatever it takes to keep the eurozone intact, says Cote.

A string of economic reports - from strong retail sales to jobs data - are far better than expected, Cote adds. Demand for stocks will likely increase as money managers who have been cautious and missing their market targets, will now try to play catch up.

Details of the ECB plan include the International Monetary Fund monitoring the central bank's unprecedented bond-buying plan aimed at lowering interest rates for eurozone nations in financial crisis. One small disappointment: The ECB announced it is leaving its benchmark interest rate at 0.75%; investors had been hoping for a quarter-point cut.

Stocks were also getting a lift from a government report showing that initial claims for unemployment benefits fell 12,000 to 365,000 for the week ended Sept. 1. And ADP, a paycheck processing firm, on Thursday said that 201,000 private-sector jobs were created in August.

Both reports suggest that hiring could improve in recent weeks although neither one consistently mirrors the government's monthly employment report.

"It was a double whammy," says Cote, referring to investors' bullish reaction to jobs data and the ECB committing to more aggressive action on the continent's financial crisis. After back-to-back good news on the employment front, "the ECB came in with the big bazooka. All told, you have to get into this market. This market is the real thing," Cote adds.

European stock markets were up sharply on Draghi's remarks. In London, the FTSE 100 closed up 121 points, or 2.1%, to 5,778.93. In Frankfurt, the DAX 30 finished the day up 193 points, 2.8%, to 7,158.11, and in Paris, the CAC 40 ended the day up 95 points, or 2.8%, to 3,500.50.

The ECB's Draghi on Thursday announced in a press conference that the central bank will buy short-term sovereign bonds with maturities of three years or less in an effort to push down interest rates, boost economic growth and stabilize financial markets in Europe.

The ECB is calling the program OMT, short for outright monetary transactions. Basically, countries that want ECB assistance would have to apply. However, the ECB says conditions will be attached to the program. Once the ECB starts buying sovereign bonds - with the hope of driving rates lower as well as providing countries with much-needed liquidity - it has the option of terminating the purchases if countries don't comply to conditions set.

Investors have been anxiously awaiting the ECB move as the economic conditions in Europe have deteriorated amid a deepening recession, sky-high sovereign debt loads and dangerously high interest rates in countries such as Spain and Italy, which are making it difficult for these countries to pay debts and keep their governments operating.

Flooding markets with liquidity has been a boon to stocks in the U.S. since the financial crisis. The Fed's bond-buying programs, dubbed quantitative easing, of which there were two, and Operation Twist, have been a key driver of the more than 100% gain for stocks since the March 2009 stock market low.


(Copyright 2012 by The Associated Press. All Rights Reserved.)