Dow Leaps in Skeptics' Rally

Cheap Money Sends Shares to 2009 High, Gold Over $1,100; Dollar's Dive Continues

By E.S. BROWNING

Overcoming their growing concerns that the broad financial-market rally could end badly, investors plowed more money into U.S. and foreign stocks, gold, oil, copper and junk bonds.
The Dow Jones Industrial Average surged 203.52 points, or 2.03%, to 10226.94, its highest finish in 13 months and its second 200-point gain in three trading days.
Gold futures finished about $1,100 for the first time, reaching a record $1,100.80 in late New York trading. The dollar, hurt by low U.S. interest rates and concerns about possible inflation, resumed its slump against the euro, breaking briefly through $1.50 per euro and closing in New York at $1.4988. Stocks around the world also recorded fresh gains.

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Part of the fuel for the broad-based investment rally is the trillions of dollars in debt-financed stimulus that the world's governments and central banks have been pouring into economies, in their effort to end the deep recession. The money enhances corporate profits, making stocks appear more attractive. Since businesses can't put it all to productive use, some finds its way into asset markets.
The huge gains have left investors surprisingly unsatisfied. Enormous though it is, the investment boom since March has been a skeptics' rally -- fed by money managers who feel they must make risky bets in order to keep up with the market, but who don't like what they see.
Gordon Fowler, who helps oversee $17 billion as chief investment officer at Philadelphia money-management firm Glenmede Trust, says he detects a "let the good times roll" attitude in the market.
"I think eventually it does end badly, but the good times could go on for a while," he says. Though heavy government spending will help corporate profits in the short run, Mr. Fowler worries that the government eventually will have to mop up its debt. "I don't think we will grow peacefully out of what is an unsustainably large debt level," he says.
Even so, he says, his portfolios currently lean toward riskier parts of the market, such as stocks, junk bonds and commodities, because that is where he thinks the gains will be for the immediate future.

 

PM Report: What's Behind the Rally?

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Barron's Bob O'Brien and MarketWatch's Laura Mandaro look behind today's big market rally; WSJ's Kim Strassel dissects the health bill and Jessica Vascellaro previews a partnership between Verizon Wireless and Google, in the News Hub.

While it's possible that new bubbles are being inflated in financial markets, history suggests there often is a lag between the moment experts identify bubbles and the time they pop. Former Federal Reserve Chairman Alan Greenspan warned in 1996 of "irrational exuberance" in the stock market, but stocks didn't collapse until 2000. While many experts warned of a housing bubble by 2005, the bubble didn't start deflating until the next year.
Yet many investors are uneasy. For these people, the market is taking on a "greater fool" feel, meaning that many don't really believe in the investments they are making. They are banking on being able to sell to a "greater fool" later.
Investment strategist Ed Yardeni of Yardeni Research in Brookville, N.Y., says he has visited managers of pension funds, mutual funds and hedge funds in Boston, Chicago and London in the past two weeks and found most uncomfortable with their investments. He calls them "fully invested bears."
"There still is a lot of trepidation that this thing could reverse itself fairly quickly," Mr. Yardeni says, adding that he shares the concerns. So why are they taking the risk? "They can't afford to miss the bull market."
The dollar, meantime, was hurt by an International Monetary Fund report suggesting that it is still strong in value -- implying it might have further to fall. The report added that, because of low U.S. interest rates, the dollar has become a currency investors borrow and then sell to invest in foreign securities. That practice, known as the "carry trade," contributes to dollar weakness but helps offshore investments.

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Some believe all the hand-wringing about the stock rally is overdone. They point out that stocks had fallen to panic-driven 12-year lows in March, before recovering. If stimulus produces real economic recovery, they say, the stock gains make sense.
Although the Dow still is down 28% from its 2007 record, it is up 56% since hitting its 12-year low in March.
Other analysts, however, see signs that at least a short-term pullback could be coming. On the past three trading days, as stocks rose, the total trading volume in New York Stock Exchange stocks was well below the year's average of 5.78 billion shares. On Monday it was 4.66 billion. Volume was higher during recent stock declines, suggesting that underlying support for stocks may be weakening.
In addition, although the Dow hit a 13-month high on Monday, broader market measures including the S&P 500 haven't returned to their recent highs.
On an inflation-adjusted basis, gold would have to hit $2,291.55 to equal its 1980 record, which makes gold bulls think it has higher to go. But it has quadrupled since 2001, when it traded below $260. In theory a defensive play, gold's big gains have made it a speculative bet for some investors, which has led some longer-term gold bulls to lighten their holdings, at least temporarily, fearing a short-term slump.

The weak dollar has contributed to demand for alternatives such as gold, oil and copper, and some investors worry that if the dollar bottoms out, even briefly, it could roil those markets.
One result is what investors call a barbell pattern, in which both defensive and risky investments benefit. That could help explain the strength of both stocks and gold, and the fact that Treasury bonds are holding ground even as junk bonds rise.
Flows of money into exchange-traded funds recently have "seemed to mark a barbell approach to risk," Credit Suisse strategist Victor Lin wrote in a report Monday. Investors are putting money into riskier investments such as foreign markets, and also safer investments such as funds holding defensive stocks and those that benefit from stock declines, Mr. Lin said.
Write to E.S. Browning at jim.browning@wsj.com