US stocks cautious after rare back-to-back weekly gains

NEW YORK - US stocks managed to chalk up back-to-back weeks of gains for the first time in 10 months after the Federal Reserve provided an unexpected boost to sentiment with an aggressive move to pump up liquidity.

By (AFP)

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Published: Sat 21 Mar 2009, 11:22 AM

Last updated: Sun 5 Apr 2015, 10:42 PM

But with investors locking in profits on Friday amid waning enthusiasm over the central bank's decision to inject another trillion dollars into the financial system to prop up the economy, analysts said the market was expected to remain cautious.

Over the week, the Dow Jones Industrial Average of 30 blue chips added 0.75 percent to end at 7,278.38 -- the first back-to-back weekly gains since May 2008 -- despite two consecutive solid days of red ink on Thursday and Friday.

The technology-heavy Nasdaq composite rose 1.80 percent to 1,457.27 while the broad-market Standard & Poor's 500 Index was up 1.58 percent to 768.54 for the week.

"As the market has already experienced two periods of panic selling -- late November and early March -- we believe the downside risk is limited," said Wachovia Securities chief market strategist Al Goldman amid increasing investor optimism about the global economy.

Investors are at their most optimistic about the global economy since December 2005, according to the Merrill Lynch Survey of Fund Managers for March, although a prolonged banking crisis seems to be stopping them from putting cash into equities.

"Investors want to believe in an economic recovery. However, caution on banks is firmly capping risk appetite," said Gary Baker, Banc of America Securities-Merrill Lynch co-head of international investment strategy.

US share prices rose the past week after fresh data showed new US home construction and building permits saw a surprise jump in February from 50-year low levels in a positive sign for the moribund home market at the epicenter of the global financial crisis.

The market turned more buoyant after Federal Reserve chief Ben Bernanke made a surprise announcement Wednesday on buying up to 300 billion dollars in Treasury bonds and an additional 850 billion in other debt in a bid to cut lending costs and fire up the sluggish economy.

But the enthusiasm died down by the end of the week as investors feared that the move carried a huge inflation risk as the more than trillion dollars in new money might have to be paid for one way or the other, through taxes or higher inflation.

"One conclusion is that the Fed is simply printing money to provide liquidity. By definition this action is always inflationary," said Fred Dickson of DA Davidson & Co.

"What remains to be seen is how long it will take to show up in the prices consumers and businesses pay for goods."

Although the market is not expecting any bombshells the coming week, it may have to contend with some weak economic numbers.

"We are expecting, however, another string of dismal economic reports," IHS Global Insight economists said in a report.

They said all indicators pointed to another plunge in existing home sales in February even if new home sales could stage a modest rebound from an all-time low in January.

A US economic contraction, at 6.2 percent the last quarter, could also be revised to show an even larger drop, said the IHS Global Insight report, forecasting 6.7 percent against a analysts consensus of 6.6 percent.

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