August a distant memory for stocks
Just six weeks after a battered stock market appeared headed to its worst drop in 4 1/2 years, the Dow Jones industrials vaulted 192 points to a record 14,088 Monday, completing a stunning recovery that has restored $2 trillion in market value.
The explosive rally on the opening day of the fourth quarter underscored the dramatic sentiment shift on Wall Street since August, when financial markets were nearly paralyzed by fears that the subprime mortgage mess would injure the nation's credit system and economy.
Since the Federal Reserve delivered a bigger-than-expected half-point cut in its target for short-term interest rates two weeks ago, credit crunch fears have been replaced by fears of being left out of a new up leg for stocks.
"Money is just racing in," says Robert Maltbie, managing director at Singular Research.
The benchmark Standard & Poor's 500 is just 0.4 percent shy of its record close on July 19. The Nasdaq composite ended Monday at its highest in six years.
Bulls are optimistic that some of the factors powering stocks have lasting power, including:
- Strength in the face of seemingly bad news. Markets rallied despite Citigroup and UBS saying they would take sizable losses on mortgage-backed securities and warned of disappointing quarterly earnings. Investors see such revelations as signals the mortgage mess is being wrung from the system and that a broad credit crunch was "imaginary," Maltbie says.
_- Stability among hedge funds. Many of the weaker hedge funds unable to withstand the market's sell-off have been forced out, says John Bollinger, president of Bollinger Capital Management. The survivors are piling into stocks, encouraged because they can still borrow money they need to invest, he says.
- Decent economic data. The Institute for Supply Management released data showing manufacturing activity in September grew at its slowest pace in six months. The fact there's still growth, though, stunned bears who sold short, betting against stocks this week, says A.C. Moore of Dunvegan Associates. To stem their losses, those bears were forced to close their positions by buying stocks, he says.
- Room for more Fed rate cuts. Investors see the market as being in a "sweet spot," says David Joy, strategist at RiverSource. If the economy is healthier than expected, that's good for corporate earnings. But if the economy is weaker than expected, the Fed still has flexibility to cut rates.
Investors are focusing on the positives and becoming "exuberant" about tech firms and companies that export to emerging markets, says Doug Sandler of Wachovia Securities. While there are concerns, investors figure "now's not the time to be getting out," he says. But, he warns, "Have a close eye on the exit door."
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