Markets at highest since May '02

USA Today

December is usually a good time on Wall Street, but with the economy looking up, businesses hiring and spending and expected strong earnings for the quarter, the major indexes are showing signs of a bull market. Bloomberg News

In a sign of the increasing confidence in stocks, investors returned from what for many was a long Thanksgiving weekend in a buying mood.

The gains on Wall Street were broad, with indexes that track small, midsize and large stocks all closing at fresh highs for the year. Among the major indexes, the Dow Jones industrials and S&P 500 notched their highest closes since May 2002, and the Nasdaq had its best close since January 2002.

Reports showing activity at U.S. factories humming along in November at the fastest clip since 1983 and construction spending in October posting its best-ever month sparked the rally. The gains came on the first day of December, which historically has been a good time to own stocks. Since 1950, the final month of the year has been the most profitable month of all for the S&P 500.

"The market is reflecting the fact that the economic numbers have been telling us not only that the economy and earnings have been good, but it will continue to be strong," says Hugh Johnson, chief investment officer at First Albany.

Despite geopolitical fears, a sinking U.S. dollar and concerns that interest rates are poised to move higher, stocks are defying skeptics. The market's resiliency is best illustrated by the fact that the S&P 500 has gone eight months without suffering a correction of 5 percent or more, Ned Davis Research says.

"On average in a 12-month period there are 2.3 corrections of 5 percent or more," says Bob Doll of Merrill Lynch Investment Managers. The fact this is the longest streak without a 5 percent dip since 1996 is an "incredibly bullish sign," Doll says. While he doesn't expect stocks to post the types of gains they have enjoyed this year with the S&P up 22 percent and the Nasdaq up 49 percent, he says the resurgence in the economy should put stocks on track for solid high single-digit gains the next 12 months.

The ability of the market to avoid sharp downdrafts is a sign that stockholders are unwilling to sell their stocks.

Right now, stocks are in a sweet spot. Signs of strength include major stock indexes hitting new highs and the number of individual stocks hitting new highs. "It is exactly what you want to see in a bull market," says Gary Kaltbaum, president of Kaltbaum & Associates.

Yesterday's reports offered fresh evidence the economy has broad-based momentum.

U.S. manufacturing expanded in November at the fastest pace in nearly 20 years, while construction spending posted another record in October.

The private Institute for Supply Management said manufacturing, the hardest-hit sector of the economy, expanded for a fifth consecutive month, posting the best performance since December 1983. In a particularly encouraging sign, employment rose after 37 months of decline.

Manufacturing improvement was widespread in November, including increases in production, and new orders and rising backlogs as factories struggle to keep up with demand.

President Bush said the report "shows the manufacturing sector of the American economy is coming back pretty strong."

In a second report, the Census Bureau said the amount spent on construction in October rose 0.9 percent to a record $922 billion seasonally adjusted annual rate. Homebuilding was strong, but commercial projects declined.

The reports buoyed the stock market. The Dow Jones industrial average closed up 117. Bond yields jumped on speculation the Federal Reserve might raise interest rates soon.

Many economists expected growth to slow from its blazing 8.2 percent rate in the third quarter to about half that pace, but some were rethinking those forecasts after the data.