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Wall Street starts firing afterburners

Wall Street turned on the afterburners over the past week as investors scrambled to get in on what some see as a building year-end rally. But some analysts remain cautious about how far the momentum will carry.

Posting a second week of solid gains, the Dow Jones Industrial Average gained 1.2 percent to close Friday at 10,530.76.

The Standard and Poor's 500 broad-market index advanced 1.8 percent to 1,220.14, giving the market a psychological lift by moving into positive territory for the year. The technology-heavy NASDAQ composite index had a banner week, surging 3.8 percent to 2,169.43.

"The positive momentum remains intact on Wall Street," said Al Goldman, chief market strategist at AG Edwards.

Goldman said stocks are "reasonably priced" based on forward earnings projections, opening the door to a positive close for the year.

"Now it is time for November to start the seasonal joy, and we believe it will," he said.

"The bull [market] is now three years old, and the economy is close to starting its fifth year of expansion. We don't expect either the stock market or the economy to act with youthful enthusiasm. However, we do expect investors to take advantage of all the goodies on the table," Goldman said.

In the last four years, the S&P 500 has risen sharply in the fourth quarter, and many investors are hoping this year will be no different and help salvage what has been a lackluster year for equities.

Paul Mendelsohn, chief investment strategist at Windham Financial Services, said the market was on a positive track because it has "very good money flows coming in" from investors sitting on the sidelines in recent months.

"People want to be long this market because of the seasonal history coming into the end of the year and that this seems to be overriding the data," he added.

Paul Nolte at Hinsdale Investments said he remains concerned about market volatility as the economic landscape shifts.

"As we are not willing to cross the tennis court during a heated match, we are not willing to place long-term investments at this time," Nolte said.

"If pressed, we believe the fourth quarter rally will take place, however it may begin later than many expect and may not be enough to pull the market much above the zero line for the year," he said.

Investors appeared to be reassured about the US economic outlook despite a weaker-than-expected 56,000 new job creations in October, which appeared to have been showing the effect of Hurricane Katrina.

Helping sentiment were strong surveys from the Institute of Supply Management on manufacturing and the service sectors of the economy, and a robust report on labor productivity.

"Setting aside the employment result, the US bore witness to a series of strong economic indicators," said Eric Lascelles, economist at TD Bank Financial Group.

Lascelles said further reassurance came from Fed Chairman Alan Greenspan, who told Congress that "economic fundamentals remain firm" and the economy possesses "important forward momentum."

One big worry for the stock market is interest rates, and the bond market appears to be showing tensions over how far the central bank will push up rates to keep inflation in check.

Joseph Abate at Lehman Brothers said feeding the fears is the change in leadership at the Fed in January, when Ben Bernanke, if confirmed by the Senate, will take over from Greenspan.

Abate said the bond market is worried about how well a new Fed chief will tackle inflation, and that feeds into market expectations.

"We worry that, when a new and untested Fed chairman is at the helm, even a temporary or minor loss of inflation-fighting credibility could propagate inflation fears, making the Fed's job much more difficult," he said.

"A number of papers focusing on central bank credibility have found that the more that [investors] believe the institution's commitment to rein in inflation, the less tightening is ultimately needed to alleviate price pressures," he said.

Bonds were hit hard over the past week. The yield on the 10-year US Treasury bond rose to 4.657 percent from 4.567 percent a week earlier while that on the 30-year bond increased to 4.852 percent from 4.773 percent. Bond yields and prices move in opposite directions.
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