Sun, Nov 20, 2005 - Page 10 News List

Wall Street firms up ahead of holidays

BUILDING UP STEAM Both the Standard and Poor's 500 and NASDAQ advanced to four-and-a-half-year highs as the US economy slows to a healthy but sustainable rate


Wall Street built a head of steam over the past week as it moved toward the holiday season, giving many investors reason to be optimistic in what has traditionally a strong period of the year.

Two of Wall Street's three main indexes rallied to four-and-a-half-year highs and some analysts say there is room for more growth because stocks remain relatively undervalued following a long period of market stagnation.

Over the past week, the Dow Jones Industrial Average gained 0.75 percent to 10,766.33, nearly battling back to its starting point on Jan. 1 of 10,783.01.

The broad-market Standard and Poor's 500 advanced 1.09 percent for the week to 1,248.27 -- its best level since June 2001. The tech-heavy NASDAQ has also hit a fresh four-and-a-half-year high, rising 1.12 percent for the week to 2,227.07.

The markets have seen four solid weeks and many say it could gain further from seasonal momentum along with a solid economic backdrop.

"Overall, the economy is slowing, but to a healthy and sustainable rate," Al Goldman at AG Edwards said.

"This should encourage the Federal Reserve board to stop the rate hike cycle by the spring at about 4.5 percent. If investors start to anticipate the Fed stopping rate hikes, the stock market would hold a party. Meanwhile, the seasonal year-end rally remains in place and trading accounts should be or get so positioned," Goldman said.

Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said the US stock market has "woefully underperformed" most other global markets since early last year, and thus remains relatively inexpensive.

"The lackluster performance of US equities over the past two years, at a time of robust earnings growth, has helped improved valuation metrics markedly," Porter said.

"Our equity valuation model, which is a modification of the Fed model, suggests that the S&P 500 is currently undervalued by roughly 25 percent," he said.

Robert DiClemente at Citigroup said the US economic picture remains solid despite hurricanes Rita and Katrina.

"A full slate of economic data in the past couple of weeks portrays a relatively robust picture of underlying demand with a few continuing hints that activity could moderate just ahead," he said.

DiClemente added that he sees a revision of the latest economic growth report to a 4.1 percent pace.

Among the few dissonant voices, Paul Nolte at Hinsdale Associates said the rally scenario appears too easy.

"Like the 5:35 pulling out of the station, the year-end rally is right on schedule," he said.

"In fact, it is gaining steam and passengers. Will the weight of everyone jumping onboard slow it down, or are the engines strong enough to pull the load to its final destination [of new highs]?" he asked.

Nolte said the rally is being fueled by an infusion of cash that may not support long-term gains.

"We still don't think the markets are ready to blast to new highs," he said.

"The money has flowed very quickly from the bearish to bullish camp and is currently at levels that have historically signaled a market decline," Nolte said.

He said there are parallels to the bubble of a few years ago, with technology attracting a lot of cash.

"Like a moth to a flame, investors are flying back to the more volatile issues, technology, while ditching the stable stocks like food, personal products and utilities," Nolte said.

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