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A leap of faith for stocks

Some fear bull market is nearing an end; others cite ongoing strength in the U.S. economy.

July 13, 2007|Tom Petruno and Kathy M. Kristof | Times Staff Writers

Wall Street gave a strong vote of confidence to the U.S. economy on Thursday, as the stock market's best-known index soared to its biggest gain in almost four years and an all-time high.

Shares rocketed after the nation's major retailers reported better-than-expected sales figures for June, sweeping away worries that consumers would rein in their spending because of troubles in the housing market.

It was a dramatic turnabout in investors' mood from just two days earlier, when stocks tumbled on fears that sinking home prices and rising mortgage delinquencies would hammer the economy.

"Now it's 'Wait a minute -- the sky isn't falling,' " said Art Hogan, chief market analyst at brokerage Jefferies & Co. in Boston.

The Dow Jones industrial average leaped 283.86 points to a record 13,861.73. The 2.1% gain was the best one-day advance for the blue-chip index since October 2003.

The latest surge may just deepen the split between investors who believe the market is nearing a peak and those who say that the global economy's strength could fuel a much longer advance in share prices.

The pessimistic view is that, after a 4 1/2 -year run, the bull market is on its last legs. These bearish investors say the outlook is increasingly dicey, as interest rates and oil prices climb.

What's more, the dollar is plunging against other currencies, suggesting that foreigners are losing their appetite for American securities.

Against that backdrop, big stock rallies are a dangerous sign, some analysts contend.

"It's certainly in the manic phase now," said Michael Metz, chief investment strategist at money manager Oppenheimer Holdings in New York.

The Dow is up 11.2% year to date after rising 16.3% last year. On Thursday, every one of the index's 30 stocks rose, a rare occurrence.

To optimists, the market is climbing the proverbial "wall of worry" -- meaning it is overcoming bad news because of an inherent sense that none of the problems will be fatal for the economy or corporate earnings growth, which underpins stock prices.

A wave of takeover activity also is bolstering shares as companies look to bulk up to better compete in world markets. Late Thursday, Energizer Holdings Inc., which makes batteries and razors, said it would pay $1.9 billion to buy consumer products firm Playtex Products Inc.

Investors have more reasons to be in stocks than to be out of them, said Sal Arnuk, a partner at Themis Trading in Chatham, N.J.

"I personally believe we're getting ready for a big run-up" in the market, he said.

"At some point you're going to see a lot of cash on the sidelines come in" to the stock market, Arnuk said, as more investors decide they can't afford to lose out on potential gains.

One of the factors driving Thursday's rally was heavy buying by traders who had "shorted" stocks, betting that prices would fall. As the market surged, these traders rushed in to close out their bearish bets -- adding fuel to the advance.

Stuart Singer, a 60-year-old hospital administrator from Long Beach, says he won't be joining any new wave of buyers.

Singer said he had all of his retirement money in money market funds.

Although the stock market's rally this year seemed tempting, he said, he's too close to retirement to want to gamble.

"At this point in my life, being in the stock market is just too risky," he said. "The top mutual fund today could be at the bottom tomorrow. I just don't like the idea that any money I have I could end up losing."

But for many investors Thursday, fear of losses took a back seat to the fear of missing another uptrend in stocks.

Wall Street was cheered as June sales reports from retailers showed surprising strength overall, despite weakness at some chains.

Wal-Mart Stores Inc. said sales at locations open at least one year were up 2.4% last month from a year earlier, about three times what analysts had estimated.

All told, "it wasn't a spectacular retail report, but it was better than expected," said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco.

Most important, the gains suggested that Americans were refusing to close their wallets even as home prices decline or tread water in many parts of the country, mortgage defaults mount and gasoline remains expensive.

Because consumers account for more than two-thirds of economic activity, they are always at the center of the debate about the economy's next move.

In recent months, investors have been focused on the weak housing market. Rising defaults on so-called sub-prime loans made to high-risk borrowers, and the continuing slide in home sales and prices, have fueled worries that the problems in real estate would be enough to drag down the economy.

But consumer spending is more dependent on growth in wages and the health of the job market than on property values, Schlossberg said.

Job growth hasn't crumbled this year, to the surprise of many analysts. In June the economy added a net 132,000 jobs, the government said last week.

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