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increasing optimism about an end to recession, reinforced by data
suggesting the economy has bottomed and is now strengthening. The
market has hit its best levels of the year, and analysts are hotly
debating whether the run-up can continue. One key for investors in
the coming week will be the message from Federal Reserve
policymakers, who are unlikely to modify the near-zero interest rate
policy, but could offer clues on recovery and the timing of any rate
hike. In the week to Friday, the Dow Jones Industrial Average of
blue chips climbed 2.16 per cent to 9,370.07, capping a four-week
surge of 15 per cent and reaching its best levels since last
November. The Standard & Poor's 500 index broke through the
psychological barrier of 1,000 points, gaining 2.33 per cent for the
week to 1, 010.48, marking a stunning gain of some 50 per cent from
lows hit in March for the broad- market index. The tech-dominated
Nasdaq added 1.1 per cent to 2000.25, bringing its year-to-date
advance to a hefty 26.8 per cent. The sparkling gains come from a
growing consensus that the recession is ending if not already over.
'Recent data reinforce our view that the US recession ended in
June,' said Dean Maki at Barclays Capital, which is calling for
third- quarter US growth of 3.5 per cent. 'We continue to expect a
recovery that is stronger than the past two but not as robust as
those that followed deep recessions in the past.' 'The rally in
equities has been nothing short of spectacular,' said Avery Shenfeld
at CIBC World Markets. 'In part, of course, it reflects the depths
of the earlier selloff ... But more importantly, markets rallied,
just as they fell, due to a dramatic change in risk aversion,
combined with an unprecedented dose of monetary easing.' But
Shenfeld said the market is 'getting closer to the end of that source
of equity momentum.' 'The next leg of the rally has to come from
earnings,' he said. 'Moderate economic growth and cost-cutting will
leave room for progress on that front, but the market will become
more selective as it looks for companies positioned for bottom line
gains.' Others also suggest the market may have gone too far in
light of a still-fragile economy. 'The rally in risky assets has
gone from strength to strength — from relief that the worst is
behind us to pricing in a 'V-for-Vigorous' recovery,' says Manoj
Pradhan, economist at Morgan Stanley. But Pradhan said that 'the
painful adjustments to household and corporate balance sheets that
are likely, given the excesses of the past, are enough to make the
economic recovery a slow and tenuous one over the medium term.'
Others contend that the market will be able to build on its rally as
company earnings improve with the economy. 'The intermediate to
longer-term trend of the major market indices from a technical
perspective is up,' said Fred Dickson at DA Davidson & Co. 'We
continue to believe that market dips will be short and shallow as
more investors focus on the possibility that the recession is finally
coming to an end. Even a modest recovery should help boost corporate
profits and hiring over the next 12 months.' Bonds were hammered
on the shifting economic view. The yield on the 10-year Treasury
note jumped to 3.854 per cent from 3. 501 per cent a week earlier and
that on the 30- year bond climbed to 4.603 per cent from 4.311 per
cent. Bond yields and prices move in opposite directions. The
coming week's focus will be the two-day Federal Reserve meeting
Tuesday and Wednesday. Additionally, investors will get data on the
US trade balance, retail sales, consumer inflation and industrial
production and quarterly results from retail giant Wal-Mart.
