Jan. 17 (Bloomberg) -- U.S. stocks are off to their best start in three years even after the bond market indicated that economic growth will slow. Prices may keep rising regardless of whether the signal gets sent again.

The Standard & Poor's 500 Index has climbed 3.2 percent this month, led by oil producers, last year's best performers. Technology companies such as Apple Computer Inc., whose sales report a week ago surpassed analysts' projections, have also been leaders. The index set a four-year high last week.

The gains followed the first ``inverted yield curve'' in almost five years. Yields on 10-year Treasury notes fell below those on two-year notes at the end of 2005, as they did before each of the past four U.S. recessions. As this year began, the inversion ended.

Even if the curve inverts again, shares may climb further because the Federal Reserve is likely to stop raising interest rates soon, some investors said. Central bankers will meet in two weeks to decide on a 14th rate increase since June 2004.

``Stocks can do very well indeed,'' said Jeffrey Schappe, who helps oversee $16 billion as chief investment officer at BB&T Asset Management Inc. in Raleigh, North Carolina. ``Inflation pressures tend to be fading.''

Financial companies including Citigroup Inc. and Merrill Lynch & Co. report earnings this week. The group, the biggest part of the S&P 500, may be the most vulnerable to changes in the yield curve because of their reliance on borrowed money.

Inflation Reports

Earnings at companies including Alcoa Inc., DuPont Co. and Lucent Technologies Inc. missed forecasts last week, and the market's January advance sputtered as a result. The S&P 500 added 2.16, or 0.2 percent, to 1287.61.

The Dow Jones Industrial Average added 0.56 to 10,959.87 after starting the week with its first close above 11,000 since June 2001. The Nasdaq Composite Index gained 11.42, or 0.5 percent, to 2317.04.

Producer-price statistics that pointed to tame inflation failed to boost the market. Prices excluding food and fuel rose 0.1 percent, less than the average estimate of 0.2 percent in a survey of economists by Bloomberg News.

The Labor Department may say tomorrow that consumer prices rose 0.2 percent in December after dropping 0.6 percent the previous month, according to the median forecast of 37 economists surveyed by Bloomberg News.

Past Recessions

Stocks had their biggest weekly decline in almost three months in the final week of 2005, when the yield curve inverted. Bullishness about stocks has rebounded since the curve returned to normal, with 10-year yields above two-year yields.

Optimism among financial newsletters rose to 56.8 percent during the week ending Jan. 6 from 55.7 percent the week before, according to a survey by Investors Intelligence.

The Treasury yield curve inverted seven times since 1980 before the end of last year, according to bond broker Cantor Fitzgerald LP. The S&P 500 rallied in the year after four of them, including 25 percent jumps that followed inversions on Jan. 6, 1989, and Jan. 22, 1982. The index fell 7.9 percent after the curve inverted on Feb. 24, 2000, for the biggest decline.

The U.S. economy fell into recession in July 1990. The year before, the yield curve's inversion ended in June, but resumed on Aug. 11. During the 12 months following that resumption, the S&P 500 fell 2.7 percent.

A yield-curve inversion was a harbinger of recessions in the economy that began in March 2001, July 1981 and January 1980.

Seeing Declines

Today's scenario is most similar to the one in early 1989, Peter Perkins, global investment strategist at BCA Research in Montreal, said in an interview. ``That makes us much more comfortable about the economy and equity market.''

The Fed boosted rates from March 1988 through February 1989, though 10-year Treasury yields failed to keep pace, causing the yield curve to invert.

Bear, Stearns & Co.'s Francois Trahan, rated first among U.S. strategists in Institutional Investor magazine's survey of fund managers last year, is less optimistic.

Trahan wrote on Jan. 10 that stocks may fall soon after the Fed stops boosting rates, drawing a comparison with campaigns to raise rates in the 1950s and '60s. Back then, stocks rallied in anticipation of an end to the Fed rate increases and then dropped when the central bank actually stopped.

``The post-Fed performance of the S&P 500 could prove to be the biggest surprise of 2006,'' Trahan wrote. He added that stocks may rebound after the oncoming decline and finish higher for the year.

Looking Ahead

Interest-rate futures suggest traders expect the Fed will raise the target rate for overnight bank loans to 4.5 percent at its Jan. 31 meeting. The odds of an increase to 4.75 percent at their next meeting, on March 28, are 56 percent.

Among the S&P 500, 67 members are scheduled to report quarterly results this week. Thirty are financial companies, including Citigroup, the world's biggest bank; Merrill Lynch, the world's biggest securities firm by market value; JPMorgan Chase & Co., the third-largest U.S. bank; and Wells Fargo & Co., the country's fifth-largest bank.

Financial stocks rose 15 percent on average in the year after the last three inversions, according to data from Birinyi Associates Inc., a Westport, Connecticut-based fund manager and research firm. Savings banks and mortgage lenders did the best, rising 40 percent. Brokers gained 39 percent.

``Banks tend to do well because the market starts to anticipate the Fed's next move, which is cutting rates,'' said Mark Morgan, an analyst with Rochdale Research in New York.

Benign Move

Still, the fact that inflation isn't surging is encouraging some investors to speculate that stocks can keep climbing in the face of an inverted yield curve.

``There's not a big inflation problem,'' said Lincoln Anderson, chief investment officer who helps oversee about $2.5 billion at LPL Financial Services, in an interview from Boston. ``Under those circumstances, you get a benign yield-curve inversion.''

To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net.

Last Updated: January 17, 2006 00:11 EST