Stock market: why it closed at highest level since August 2008

Wall Street started the new year with its own fireworks – a lively session with explosive gains all day.

By the end of the session, the Dow Jones Industrial Average popped 93.24 points, closing at 11670.75, the highest level since August 2008.

Investment analysts attributed some gains to the traditional “January effect,” in which stocks that did poorly at the end of last year move higher in the new year without much selling pressure on them. Also, some economic news is continuing to come in a little stronger than Wall Street anticipated. And some investors may be starting to move money into the stock market and out of the bond market, which is not expected to do well this year.

“We seem to be getting the opening-day rally we’ve seen over the last 13 years,” says Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research in New York.

Some positive news came early on Monday, when the manufacturing index of the Institute for Supply Management (ISM) rose modestly. The data were encouraging because of stronger orders and production, economists said.

In addition, construction spending in November rose 0.4 percent, according to the Commerce Department. This marked the third month in a row of improvement.

Investors also may have been buying on Monday since the market has done well on the first trading day of the year since 1997, Mr. Stovall says. And historically, the January after midterm elections has been good, with the Standard & Poor’s index rising 4.3 percent on average 95 percent of the time since World War II, says Stovall.

In the first quarter of a president’s third year, he says, the S&P index has advanced an average of 7.1 percent since World War II.

“History appears to be repeating itself,” Stovall says. “But of course, that is no guarantee of future results.”

Many investors make the so-called January effect a part of their investment strategy, says Clark Hodges, who runs Hodges Capital, a money-management and investment advisory firm in Dallas. For example, he says, a lot of blue-chip stocks sold off at the end of last year rose sharply on Monday.

The stock of one company he owns, Intuitive Surgical, fell from $390 a share in January 2010 to $260 a share at the end of the year. On Monday, the stock rose $11.25 a share.

Some investors are busy moving out of bond funds and into stock funds, Mr. Hodges says. “You hear so many negative predictions on the bond market,” he says. “If you get that switch from bonds, that is a lot of money that could flow into stocks.”

Stock analyst Fred Dickson of D.A. Davidson & Co. in Lake Oswego, Ore., expects the rally could continue over the short term. But in a week, he says, companies will begin to report their earnings for the fourth quarter and will issue their guidance looking ahead. “We will have to see how investors react to what the companies are saying,” he says.

Some companies, he says, may decide to increase their capital expenditures in 2011 to take advantage of the changes that President Obama and Congress made late in the year, allowing companies to write off 100 percent of their capital investments in one year. “Depending on how the traders view that guidance, which could be for lower earnings, we may see some kind of pullback,” he warns.

Although Congress returns on Wednesday, traders won’t be swayed by those histrionics, Mr. Dickson says. “I don’t think we’ll get much reaction in the markets,” he says.

However, Stovall says, if Congress is at loggerheads with Mr. Obama this year, it might not be so good for investors. “The market performs three times better when it’s all the same party than when it’s a different party from the president,” he says. “Usually when it’s gridlocked, Congress impedes rather than leads.”