The Dow Jones Industrial Average moved closer to an all-time high this week, as improving economic sentiment overrode concerns about looming government spending cuts.
The Dow closed on Friday at 14,089.66, up 0.64 percent for the week and within striking distance of the all-time peak of 14,164.53.
The gain came despite US$85 billion in federal budget cuts known as the sequester that were to kick in on Friday, the result of the political deadlock in Washington blocking a compromise deficit-reduction program.
Some analysts expected the Dow to break the all-time record soon, potentially next week.
The broad-market S&P 500 index closed the week at 1,518.20, up 0.17 percent, while the tech-rich NASDAQ finished at 3,169.74, up 0.25 percent.
The week saw US Federal Reserve Chairman Ben Bernanke, in testimony to the US Congress, reaffirm and defend the Fed’s policy of aggressive bond-buying that has pumped liquidity throughout the economy, lifting stock prices.
Most of the week’s economic reports were strong. The embattled housing sector had fresh signs of turning the corner, with rising new-home sales, stronger pending sales and climbing prices.
The VS Conference Board’s consumer confidence index for January exceeded expectations by a wide margin, while manufacturing data and jobless claims were also positive.
Most of the data pointed to improvement, IHS Global Insight economist Paul Edelstein said.
The Dow opened the week on Monday with its biggest single-day drop since November last year following the inconclusive Italian election. However, the blue-chip Dow chalked up gains three of the four other days.
By week’s end, the US$85 billion in budget cuts known as the “sequester” had progressed from a point of debate to an impending reality, with virtually no hope a deal could be reached to avert them before the midnight deadline.
Some economists say the cuts could shave 0.5 percentage points from economic growth. Yet the market’s upward move suggested it agreed with those who stressed that they amount to just 2.4 percent of the federal government US$3.55 trillion budget.
The sequestration “does not mean the end of the world,” said Hugh Johnson, chairman and chief investor officer at Hugh Johnson Advisers.
Edelstein said markets were beginning to take Washington debates in stride.
“Markets are learning to deal with this kind of uncertainty and so they don’t get rattled with every gyration in fiscal policy,” Edelstein said.
He said a bigger risk could come from Europe if Italy backpedaled on its austerity policy or needed a bailout. Mace Blicksilver, director of Marblehead Asset Management, said the Dow would probably breach the all-time record “just because liquidity is so great.”
However, Blicksilver said the effects of higher payroll taxes that started on Jan. 1 and higher gasoline prices could weigh on markets.
Markets will get a fresh stash of data next week, with the biggest spotlight on last month’s nonfarm payrolls and unemployment, which will be reported on Friday.
Chris Low of FTN Financial said weak job figures in the January report in light of the upward revisions to jobs gains for November and December last year.
However, if last month’s figures were weak again, “there’s a possibility that the market perception of job growth, which is the most important gauge of the economy, could change significantly,” Low said.