Wall Street opens the month with guarded optimism, as hopes mount that the worst of the economic storm is over and that the peak has passed for surging crude oil prices.
The market is looking past the latest woes, analysts said, to a stronger economy with increasing worries about inflation.
In the holiday-shortened week to Friday, the Dow Jones Industrial Average of 30 blue-chip shares advanced 1.27 percent to 12,638.32.
Among the other major indexes, the Standard & Poor’s 500 broad-market index rallied 1.77 percent to 1,400.38 and the technology-studded NASDAQ composite jumped 3.19 percent on the week to 2,522.66.
The stock market closed out last month with a generally positive tone. The Dow fell 1.43 percent for the month, but the NASDAQ rose 4.55 percent and the S&P increased 1.06 percent.
The stock market’s trajectory in recent weeks has been linked to crude oil, which has been on a breathtaking surge but has shown signs of a bubble, according to analysts.
Crude hit US$135 a barrel earlier this month and then retreated, leading some to bet that this was the “top” and that a retreat is coming.
New York’s main oil futures contract ended the week at US$127.35 a barrel.
Easing energy costs could help support a recovery in the fragile economy in the US, hovering on the brink of recession, as well as in the rest of the world.
The action in oil prices suggests “that speculators are beginning to focus on the fall in demand,” according to John Wilson, analyst at Morgan Keegan.
If oil continues downward, it will be a big positive for the stock market, Wilson said.
“We believe the [stock] market is on the verge of a very nice move and we would be more aggressive in our purchases,” he said.
The bond market meanwhile suffered. The yield on the 10-year Treasury bond leapt to 4.046 percent from 3.831 percent a week earlier and that on the 30-year bond surged to 4.707 percent against 4.557 percent. The rise in yields means a decline in bond prices.
Investors still face a number of worries, said Ed Yardeni of Yardeni Research, who argues that aggressive moves by the Federal Reserve to counter the US economic slowdown have pushed up inflation and rattled the bond market, which could hurt stocks.
“The bond vigilantes are becoming increasingly concerned that the Fed’s unprecedented moves to flood the financial system with liquidity since March may be setting the stage for a rebound in economic growth and inflation,” he said.
Scott Anderson, senior economist at Wells Fargo, agrees that long-term investors are looking ahead to an economic recovery as well as potential inflation problems.
“It appears the Fed’s aggressive rate cuts, liquidity injections, and Bear Stearns rescue have effectively truncated the downside risks to the economy,” he said.
“The Fed’s soothing monetary medicine is starting to take effect, though the patient has not yet fully recovered. The market’s attention is now fully focused on the inflation problem, and the Fed will soon shift its focus as well. The next rate move from the Fed will almost certainly be a rate hike,” Anderson said.
He said that the Fed would at some point move from its current 2 percent base rate to “a more neutral federal funds rate, which I believe is somewhere between 3.5 and 4.0 percent.”
In the coming week, the market will get economic data on the factory sector from the Institute of Supply Management and monthly sales data from major automakers. The reports will likely show the troubles of the manufacturing sector and consumer hesitation to make large purchases.
Looking ahead to Friday, a monthly report on the labor market may provide one of the best snapshots of the economy.
Analysts are expecting the nonfarm payrolls report to show a net loss of 50,000 jobs, which would point to sluggish growth in an economy that still could avert outright recession.
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