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Analysts hopeful rally will continue

Wall Street heads toward Christmas sitting on healthy gains for the year after another solid week, and some analysts say the so-called Santa Claus rally may not be over yet.

The blue-chip Dow Jones Industrial Average vaulted to a new all-time closing high on Friday of 12,445.52 with a weekly gain of 1.12 percent.

The broad-market Standard and Poor's 500 advanced 1.22 percent for the week to a fresh six-year high of 1,427.07 while the tech-weighted NASDAQ composite index climbed 0.81 percent to 2,457.20, its best level since early 2001.

With two weeks left in the year, the Dow is up 16.1 percent for the year, with the S&P rising 14.3 percent and the NASDAQ 11.4 percent.

Gains over the past week were underpinned by a statement from the Federal Reserve largely in line with expectations. The Federal Open Market Committee, which left rates unchanged, said the economy was cooling and markets saw this as opening the door to a rate cut next year.

Adding to the cheer were better-than-expected reports on inflation and retail sales. The consumer price index (CPI) was unchanged for last month while retail spending grew a surprising 1.0 percent.

All this helped ease investor fears about a faltering US economy while opening the possibility of lower interest rates next year.

"The CPI numbers came out below expectations, which was a good surprise and means that the Fed could potentially lower its interest rates in the first half of 2007," said Owen Fitzpatrick at Deutsche Bank.

"All we wanted this holiday season was a little more growth and little less inflation," said Wachovia economist Mark Vitner in a note to clients on Friday. "Boy oh boy has Santa delivered! First we got news that retail sales were much stronger than originally thought, and then today we get news that inflation was unchanged November."

Another positive factor for the market in the final weeks of the year is that portfolio managers are trying to make late purchases to reflect the best gains.

This "window dressing" phenomenon means managers will want to show at the end of the year they are holding the best-performing stocks.

"There should be a Santa Claus rally," said Marc Pado at Cantor Fitzgerald.

"Funds want to make their portfolios look pretty and at the end of the year, they buy the stocks that have performed the best this year like Google ... When you had an up year, the window dressing is even higher," he said.

Stephen Gallagher, economist at Societe Generale, said there is some concern because the bond market is reflecting a weak economy but the stock market sees good times, so one or the other is wrong.

"Investors remain convinced that rate cuts will be necessary," he said. "Historically, when expectations have been this strong, the market tends to be correct."

Bob Doll, chief investment officer at BlackRock, echoed those concerns.

"The weakening dollar and relatively low bond yields seem to be signaling that the US economy may experience some trouble," he said.

"On the other hand, stronger equity and commodities markets point to continued strength," he added.

"We continue to believe that the economy is headed for a soft landing, although we remain cautious in our view since there are still some risks to economic growth and since the Fed has not yet signaled it is ready to adopt a more accommodative monetary policy," he said.

Bond prices fell over the week. The yield on the 10-year Treasury bond rose to 4.597 percent from 4.552 percent a week earlier, while that on the 30-year bond increased to 4.718 percent against 4.661 percent.

Bond yields and prices move in opposite directions.
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