Sun, Dec 21, 2003 page10

• NYSE blue-chips reach year's peak

  • AFP
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  A solid week of gains on Wall Street delivered the kind of present most investors were hoping for at Christmas, with blue chips at their highs for the year and prospects upbeat for next year.

  The Dow Jones Industrial Average of 30 blue-chip companies gained 2.35 percent in the week to Friday to end at 10,278,22, extending its rally to stay well above the psychological 10,000 mark and holding at its highest level since May last year.

  The NASDAQ composite mean-while edged up 0.1 percent for the week to 1,951.02 and the broad-market Standard & Poor's 500 index rallied 1.35 percent to 1,088.66.

  Investors appear content to sit on their gains after a rally of more than nine months that has pushed the Dow up some 37 percent from lows in mid-March.

  In the same period the NASDAQ has surged 53 percent and the S&P 500 has gained 36 percent.

  Over the past week, the event that first appeared as a strong catalyst -- the capture of former Iraqi president Saddam Hussein -- fizzled out, even though the markets managed to move higher later in the week.

  Smith Barney equity strategist Tobias Levkovich cautioned investors against betting too much on a single event.

  Limited effect

  "Terrorism is unlikely to stop as a result and regional stability was never just one arrest away," Levkovich said.

  Paul Nolte, director of investments at Hinsdale Associates, said the harder task would be to determine what happens next.

  "Eventually it [the capture of Saddam] was to happen, and the reaction would be predictable, however we can also argue rather convincingly that it does little to alter the US economy and change corporate/consumer attitudes about spending," Nolte said.

  While investors appear to be rejoicing over the holiday season, strategists are plotting their course for next year with some caution. Even though the economic backdrop appears favorable, a repeat of this strong year appears unlikely.

  "We think that the economic cycle is in a later stage than many observers believe it is," said Richard Bernstein at Merrill Lynch.

  While smaller companies helped the NASDAQ to outsized gains this year, Bernstein and others say more established companies will take over the leadership.

  "The stock market has gone through a textbook sector rotation during the past couple of years ... Based on that rotation, we continue to think that investors should shift their portfolios toward later-cycle stocks such as those in the materials and energy sectors," he said.

  Sung Won Sohn at Wells Fargo Bank said Wall Street will be keeping a close watch on the Federal Reserve and its moves to boost interst rates, which is likely to happen sometime next year.

  "The current bull market will continue as long as the central bank pursues easy monetary policy," he said.

  Discount rate

  "Equities do not perform well when the Federal Reserve raises the fed funds rate, leading to higher bond yields. It increases the effective discount rate for equities ... In any case, 2004 will be a challenging year for equities," Sohn said.

  Economic growth will slow and the earnings momentum will lose steam. Under these circumstances, the stock market will be volatile and won't be as vibrant as 2003 has been," Sohn said.

  Bonds firmed on expectations of low inflation and low interest rates from the Fed.

  The yield on the 10-year US Treasury bond dipped to 4.133 percent from 4.242 percent a week earlier and that on the 30-year bond to 4.961 percent from 5.088 percent. Bond yields and prices move in opposite directions.
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