What a Week: Shifting the Paradigm

Traders spent most of January pricing in strong growth and low inflation. This week the Federal Reserve itself endorsed the Goldilocks tale.

The Federal Open Market Committee kicked off the year with a paradigm shift in its policy statement. Put simply, the Fed said growth got stronger and inflation got weaker. But the central bank kept rates steady and retained its tightening bias.

The Fed warned of wage inflation, but Friday's nonfarm payrolls report shoved off any immediate threat. With a weaker-than-expected 111,000 addition of new jobs, average hourly wages rose 0.2% to a 4% year over year pace -- lower than December's scary 0.5% jump and 4.2% year-over-year pace.

"Real growth is better than most expected, and inflation is better than most expected," says James Paulsen, chief investment strategist at Wells Capital Management. "That puts the Fed in a holding pattern, and you can't think of a better world for stocks."

Such satisfied contentment powered the Dow Jones Industrial Average, the Dow Jones Transportation Average and the Russell 2000 to new highs during the week. The Dow came off the boil Friday, dipping slightly on more than 1% losses in Boeing(BA Quote), Alcoa(AA Quote) and Microsoft(MSFT Quote). But on the week, the blue-chip index jumped 1.3%, the S&P 500 added 1.8%, and the Nasdaq Composite jumped 1.7%.

The Dow Transports ended the week up 6.2% to close at a new record high for the first time since last May. The index finished the week at 5006.89.