Stocks Finish at Session Highs

The gains of 2003 are, for now, continuing into the new year. Some strategists fear the rise won't be so robust

Stocks finished with broad gains Monday, the first full-volume trading session of the year, ending the trading day at session highs amid more solid economic data and growing optimism that 2004 will be another strong year for equities.

On Monday, the Dow Jones industrial average rose 134.22 points, or 1.29%, at 10,544.07. The broader Standard & Poor's 500 index gained 13.73 points, or 1.24%, to 1,122.21. The tech-heavy Nasdaq composite index rose 40.68 points, or 2.03%, to 2,047.36.

Technology and commodity-related (gold, silver, oil) concerns led advancers. Among the blue-chip leaders were Caterpillar (CAT ), Microsoft (MSFT ) and SBC Communications (SBC ).

In economic news, November construction spending rose 1.2%, significantly higher than economists' prediction of a 0.5% increase. That makes the sixth straight month of gains for the gauge.

Tuesday brings more economic reports. The ISM non-manufacturing index is expected to show a rise for the month of December while factor orders in November are expected to show a decline of about 1.2%.

Optimism may be warranted, but performance in 2004 may not match up to last year. "Valuations are appropriate for the environment we envision in 2004 at 18 to 19 times forward earnings," writes PNC Advisors' chief investment strategist Jeffrey Kleintop. He expects stocks could rise 10% in 2004, which is "welcome, but unspectacular compared to 2003."

Bonds are likely to offer returns in the low single-digits with rising interest rates acting as a headwind, the strategist says. Worries points for Kleintop include a significant rise in interest rates, continued decline in the dollar, more mutual fund scandals, and headlines of terrorist attacks.

Standard & Poor's team of investment strategists also expresses caution. "History suggests that current investor expectations may exceed results," S&P says. Between 1929 and 2002, the S&P 500 stock index has increased annually by 20% or more on 20 occasions. Thirteen of the years after those years with 20% jumps saw a further advance, but only an average of 6.8%.

Software company Siebel Systems (SEBL ) helped boost tech issues after it raised its fourth-quarter guidance, citing higher license revenue.

The Observer newspaper in England said blue-chip retailer Home Depot (HD ) was considering an 8 billion pound ($14.3 billion) bid for British home improvement retailer Kingfisher Plc. Neither company has yet to comment on the matter.

In earnings news, Walgreen (WAG ), the biggest U.S. drugstore chain, reported a rise in profit of 10% in its most recent quarter amid demand for flu and cold remedies and the success of new services like digital photo development. Total sales grew by 17% and same-store sales rose by 12%.

Outback Steakhouse (OSI ) said December sales rose 2.5% in among its stores open at least 18 months. The company says its 2004 beef costs will be about 9% to 10% higher than 2003 levels, which is in line with its earlier forecast.

Drug giant Eli Lilly & Co. (LLY ) guided Monday that its profits in 2004 should rise by 9% to 10%, though high marketing and research expenses will fall shore of Wall Street estimates. The company sees EPS of $2.80 to $2.85 in 2004, excluding significant unusual items.

Treasury Market

U.S. Treasuries finished lower in price amid stronger than expected data on manufacturing and construction spending. High expectations for equities are also diverting buyers from bonds.

Comments from Fed Governor Ben Bernanke could be offsetting some of these bond-unfriendly factors. Bernanke emphasized the Fed's ongoing accommodative rate policy position.

The most anticipated data of the week will be December payrolls, due on Friday. The unemployment rate has been holding stubbornly at 5.9%.

World Markets

European stocks finished mostly higher following the lead of U.S. stocks. London's Financial Times-Stock Exchange 100 index added 3.10 points, or 0.07%, at 4,513.30, with weakness coming from pharmaceutical and oil concerns. In Paris, the CAC 40 added 11.49 points, or 0.32%, at 3,608.29. Germany's DAX index gained 17.40 points, or 0.43%, to 4,035.90.

In Asia, Japan's Nikkei 225 index, in a half-day session jumped 148.53 points, or 1.39%, to 10,825.17, in reaction to recent upbeat data on U.S. manufacturng. Hong Kong's Hang Seng index added 203.85 points, or 1.59%, to close at 13,005.33.

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