A year after the stock market began its comeback from 12-year lows, investors are looking for the next big thing.
Stocks have lost some of the momentum that propelled the Dow Jones industrials up 61 percent from its close of 6,547 on March 9, 2009. That's natural — bull markets tend to slow down as they head into their second year. But the lethargic pace of the economic recovery has also been a bit of a drag on stocks. And so investors are waiting for signs that the economy is ready to put up some solid, sustainable growth numbers.
The most likely trigger: job growth. Investors need to see a Labor Department report that says employers are creating more jobs than they're cutting.
Until then, investors are going to stay cautious. Analysts say the market is likely to move sideways or drift higher, as it's been doing over the past few weeks. Tuesday's trading fit the pattern of modest moves. The Dow jumped but then cut its gain to about 10 points. The average is up 1.4 percent so far this year.
On Tuesday, the financial stocks that have led the market higher in the past year again drove trading. Analysts said financial shares rallied as traders reacted to rumors that the government might prohibit the trades known as short sales in stocks of companies it owns. The government has large stakes in insurer American International Group Inc. and mortgage companies Fannie Mae and Freddie Mac after bailing them out during the 2008 financial crisis.
The market began its ascent last March 10 after Citigroup Inc., the big bank most badly wounded by the credit crisis and the recession, said it had turned a profit. Signs that the housing market was starting to turn around added to the momentum.
At the time, such news, which amounted to glimmers of hope, were enough for investors. With stock prices so much higher now, they want proof.
"A lot of the gains we already enjoyed have been in anticipation of economic progress which has not yet occurred," said Lawrence Creatura, portfolio manager at Federated Clover Investment Advisors.
Besides jobs, investors need to see more strength in the housing market. Traders have been tolerant of recent declines in home sales, but if those numbers don't pick up, the market is likely to become uneasy.
First-quarter earnings reports that will be issued next month need to show continued sales growth. Companies' results for the last three months of 2009 were better than expected. Now the market wants to know that demand, starting with consumers, is rising.
Adam Gould, senior portfolio manager at Direxion Funds in New York, said he will be looking for at least two months of back-to-back gains in job growth and for the unemployment rate to fall below 9 percent to feel more comfortable about the pace of recovery. Unemployment stands at 9.7 percent.
Even if the news improves, just holding the gains of the last year could be tough. Some of the market's big gains in past years were followed by slumps. In the first year of the 1982-87 bull market, the Standard & Poor's 500 index jumped 58 percent. In the second year, the index fell 14.4 percent.
That doesn't mean that's what will happen this time. In 2003, the S&P 500 index rose 26.4 percent. Then, in 2004, it peaked early and fizzled, until a 10.7 percent surge late in the year lifted stocks.
In late afternoon trading Tuesday, the Dow rose 11.03, or 0.1 percent, to 10,563.55. The S&P 500 index rose 1.23, or 0.1 percent, to 1,139.73. The index is up 68.3 percent in the past year. Including dividends, it's up 72 percent.
The Nasdaq composite index rose 5.52, or 0.2 percent, to 2,337.73. The Nasdaq is at an 18-month high but still down by more than half from its peak 10 years ago Wednesday. On March 10, 2000, it rose to 5,048.62 during the height of the dot-com bubble.
Advancing stocks narrowly outpaced those that fell on the New York Stock Exchange, where volume came to 867.7 million shares.
Investors are going to make much smaller bets than they made a year ago as they look for clues about the economy. They'll also be trying to anticipate when the Federal Reserve will start raising interest rates from their current record low levels. Policymakers have kept rates low to stimulate lending and help the economy. And Fed Chairman Ben Bernanke has predicted rates will stay where they are for some time.
Still, the Fed eventually will have to raise borrowing costs to help keep inflation in check. Investors' fear is that rates might rise too quickly and could choke off the recovery.
Although stocks have been creeping along so far this year, some analysts still see some worrisome signs that investors could become overenthusiastic.
Jeffrey Frankel, president of Stuart Frankel & Co. in New York, believes investors are becoming too complacent.
Frankel points to the movement in a stock like Apple Inc. as a sign that investors are letting greed take over. Apple been setting new highs in recent weeks and is up 5.4 percent in 2010. In the past year, it jumped 163.6 percent.
"You're having wild moves in stocks again. You're having a herd mentality chasing stocks," he said.
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