Giddy Consumer, Earnings Keep Stocks Hopping

Updated from 4:01 p.m. EST

Stocks gained on the day and week, with the major indices closing at new two-year highs after positive earnings reports from General Electric (GE Quote) and Juniper Networks (JNPR Quote) and a strong showing from the American consumer.

The Dow added 46.66 points, or 0.4%, to 10,600.51 and the S&P 500 gained 7.77 points, or 0.7%, to 1139.82, both new 22-month peaks, while the Nasdaq rose 31.38 points, or 1.5%, to 2140.46, its best close since July 2001.

The Dow advanced 1.4% on the week and the S&P rallied 1.6%; both indices have now risen in eight consecutive weeks. It's the latter's longest winning streak in almost six years. The Nasdaq improved 2.6%, its sixth straight up week.

Volume was heavy; 1.72 billion shares traded on the New York Stock Exchange, while 2.59 billion shares changed hands on the Nasdaq. Advancers beat decliners by about 3 to 2 in both markets.

"New money is coming in and is being put to work," said Tim Heekin, director of trading at Thomas Weisel Partners. "Investors are comfortable with the dollar, earnings, valuations and economic figures."

"The path of least resistance is up, and until money stops coming in, we are going to keep moving up," added Heekin.

The University of Michigan's consumer sentiment index soared to a three-year high of 103.2 in January, from 92.6 in the previous month; economists had expected a smaller increase to 94.

In addition, industrial production rose by only 0.1% in December, decelerating from 0.9% in November; economists had expected a 0.5% increase. Also, capacity utilization was unchanged at 75.8% in December, slightly weaker than the consensus estimate of 76%. Finally, business inventories rose by 0.3% in November after a 0.4% increase in October; this was close to expectations.

Other Markets

Overseas markets finished mostly higher. Germany's Xetra DAX gained 1.1% to 4112, while London's FTSE 100 closed up 0.7% at 4488. In Asia, Hong Kong's Hang Seng closed down 0.6% at 13,167.8, and Japan's Nikkei rose 1.8% at 10,857.2.

The 10-year Treasury note fell 16/32, yielding 4.03%.

The dollar found support in a Treasury Department report that said foreigners invested a net $87.6 billion in U.S. financial assets in November, more than triple October's level. The greenback was stronger vs. both the Japanese yen and the euro. Recently, the euro was fetching $1.2373.

Crude oil futures soared 4.9% to $35.07 per barrel, as frigid weather grips the Northeast for the second time in two weeks.

A Bull Market for Stocks and Bonds

Treasuries sold off and stocks rallied today, in reaction to signs that the U.S. economy continues to improve. This reaction is typical, but more recently, both asset classes have benefited from what several strategists believe is a unique economic environment. It is very rare for growth to be so strong and not spark inflation. Yet that is exactly what is happening now, making the asset allocation decision that much more confounding.

"The current global environment is working to keep inflation low," while ensuring that growth remains on track, said Tower. This is due to several factors including recent productivity gains and a weak labor market.

John Canavan, Treasury market analyst at Stone & McCarthy, echoed this sentiment. "Treasury yields don't need to rise simply on strong growth, but what that portends for inflation; inflation is low and should remain low in the near future."

"Low rates are helping stocks," by boosting economic growth and corporate profits, added Canavan. Longer maturity Treasury yields are not backing up because inflation is so low, and shorter-term Treasuries are stuck at such low yields because the Federal Reserve looks to be on hold for the foreseeable future.

With the 10-year Treasury's yield dipping below 4% Thursday and most strategists warning that an interim correction is likely for stocks, what's an investor to do?

For investors looking to weather what could be an impending storm for equities, Canavan implies that bonds may be a good place to park some money for the time being. "Through the first quarter, Treasury yields will most likely be stuck in a range, with the Fed firmly committed to remaining on hold and with no inflation pressures getting through."

Movers

On Friday, General Electric said it earned 45 cents a share in the fourth quarter, matching Wall Street's consensus. Revenue increased 4.1%. The shares rose $1.35, or 4.2%, at $33.35.