Stocks End At Record More Bounce Seen, Then Correction

The beginning of a New Year is typically a cause for celebration on Wall Street, and this year will be no different. Still, gains are likely to be tempered as investors await the full impact of Y2K.

U.S. stocks ended the year at record highs, with the Dow Jones industrial average up 91.36, or 0.8 percent for the week, to 11,497.12. The Nasdaq composite index closed the week up 99.87, or 2.4 percent, to 4069.31. The S&P 500 index finished the week up 10.91, 0.7 percent, to 1469.25. For the year, the Nasdaq has climbed 85 percent, while the Dow is up about 25 percent and the S&P 500 has surged more than 19 percent.

“If we survive Y2K, and it looks like we’re going to, there could be some enthusiasm in the early part of the week,” said Larry Rice, chief market strategist at Josephthal, Lyon, Ross. “It’s going to be crazy and volatile, but there will be no change in the leadership.”

Rice said that an influx of cash from Christmas bonuses and pension contributions would provide a lot of liquidity, which could push prices to new highs next week. However, he cautioned that the Federal Reserve would soon begin to drain liquidity, which could offset the usual “January effect.” The Fed has been pumping money into the system recently to shore up reserves in the event of any Y2K glitches.

Analysts note that while the market should continue to post impressive gains in the coming month, a correction is likely to occur by the end of the first quarter. Barry Hyman, senior market strategist at Ehrenkrantz King Nussbaum, also expressed concerns about rising bond yields.

“If interest rates get up to 6.5 percent or 6.6 percent, that could disturb the market, especially as we get closer to February,” Hyman said.

Indeed, most analysts now expect the Federal Reserve to raise the short-term lending rate by 25 basis points when it meets Feb 3, and some say this could be the catalyst for a much-needed pause in the equities market.

The Nasdaq composite index hit the key 4000 level this week with red-hot technology stocks fueling the gains. Analysts said while this is simply a psychological landmark, it proves that tech is still the place to be, despite the valuation concerns.

Close: 11,497.12 For year: Up 2,315.69