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US STOCKS, bolstered by the Federal Reserve's interest rate cuts, have risen 16 per cent since 9 October. The Dow hasn't gained that much in a six-week period since 1982 - and more gains are in store as the market continues its fast comeback from the summer slump, investors say.
The Dow rose 240 points last week to 9,159.55, after falling as low as 7,632 on 1 October. Shares of financial stocks may have the best gains this week. Lower interest rates make it cheaper for banks and brokers to finance their businesses. Merrill Lynch, for example, gained 87 per cent in the past five weeks.
"The stock market was threatened by a lack of profit growth," said Howard Ward, a money manager at Gabelli. "Now the message is even if we have a quarter or two of anaemic growth, the Fed is going to push to avoid a recession."
Last week, the S&P 500 gained 3.4 per cent, the Dow Jones rose 2.7 per cent and the Nasdaq gained 4.3 per cent. But the indexes are still below their July record highs.
The Fed's three rate cuts, which reduced the target for banks' overnight loans to each other to 4.75 per cent from 5.50 per cent, erased much concern.
"You're probably going to get a move in stocks to new highs," said John Cleland, investment strategist at Security Benefit Group.
Some investors aren't convinced the rally will last. "For stocks to shoot up this much in such a short period of time on nothing more than a prayer that things are going to be better is troubling," said Edgar Peters, at Panagora Asset Management. "The speculative bubble is filling up again."
One danger sign is the speculation in internet stocks. Many of these companies have yet to turn a profit but have roared ahead. The online bookseller, Amazon.com, soared 41 per cent in the week, while Yahoo! jumped 14 per cent. "It's a speculative bubble," said Ward. "I cannot justify buying those stocks at these price levels."
In the bond market investors are snapping up 30-year Treasury bonds, wagering the Fed's third interest rate cut in seven weeks is the last to be seen this year.
"Expectations for further interest rate cuts have been wound out of the market," said Chris Sullivan, of the United Nations Federal Credit Union. "Bonds are good value here." Yields fell 2 basis points on Friday to 5.22 per cent. Copyright: IOS and Bloomberg
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