How much higher can stocks go?

John W. Schoen Senior producer • Profile • E-mail

Money makes the world go around — and these days it’s making the U.S. stock market go up. As long as huge flows of capital continue pouring into stocks, say analysts and market watchers, prices will keep going higher. The question on some investors’ minds: How long can this go on?

Apparently defying gravity, the market broke new ground again Wednesday, with the Dow Jones industrial average jumping 111 points to close at 13,633.

The Dow's frequent records have grown almost routine in recent weeks, but even more significant Wednesday was that the broader S&P 500 — the benchmark index used by millions of individual investors and their retirement funds — finally broke through its 7-year-old high-water mark to close at a record 1530.23.

(Among the major indexes only the Nasdaq composite — where the late-1990s Internet bubble was heavily concentrated — has failed to overtake its all-time high. And it is unlikely to do so anytime soon. The Nasdaq index, at 2,592, is at about half its record level of more than 5,000 reached in March 2000.)

But no one is talking about a bubble today. For the moment, the upward trend appears to be all but unstoppable. Since hitting a bear-market low in October 2002 of 776, the Standard & Poor's 500 index has nearly doubled — with only brief retreats along the way. The Dow industrials — also nearly double its 2002 low — have been breaking new ground since October, setting a new record more than once a week on average.

On Wednesday, investors shrugged off a sharp pullback in Chinese stocks, unlike a similar Shanghai selloff in February that took a 500-point bite out of the Dow. This time around, the U.S. market barely skipped a beat.

The focus instead was on a fresh report from the Federal Reserve indicating that while the central bankers are still worried about inflation, they think the odds favor a gradual easing of price pressures. And while the housing slump looks like it may deepen, the Fed doesn't see that weakness dragging the broader economy into a recession, according to the minutes of the latest rate-setting meeting this month. All of which was music to Wall Street's ears.

Still, while the bulls appear to be firmly in charge, there were those offering reminders that bull markets don't last forever.

“You can't have this type of a rally and not expect some sort of a breather,” he said Joseph Moglia, CEO of discount broker TD Ameritrade. “I think we have to get ready for that.”

Trillions for deals
The steady surge in stock prices is being propelled by a flood of money into the global financial markets, fueling a wave of acquisitions that shows no signs of letting up. The binge has been led largely by private pools of capital, so-called private equity funds, that have been buying up public companies and taking them private. As shares of those those companies are removed from the market, there are fewer shares available for institutional and individual investors who are restricted to publicly available stocks. That tends to push remaining stock prices even higher.

The buying binge is the biggest in decades. Some $2.3 trillion in deals worldwide — more than 15,000 of them — have been announced so far this year, according to Thomson Financial. At $857 billion and counting, U.S. private equity buying is more than triple last year's levels.

As the volume of global acquisitions has swollen, so have the price tags on the biggest deals. On Tuesday, the Royal Bank of Scotland offered $96 billion for the Dutch bank ABN Amro. In the past month, wireless carrier Alltel Corp. fetched $25 billion; General Electric agreed to sell its plastics division for nearly $12 billion; news service Reuters went for nearly $18 billion.

(MSNBC.com is a joint venture of Microsoft and GE's NBC Universal unit.)

In some cases, smaller companies are agreeing to buyouts from larger ones to better compete with big global players. In other cases, buyers of public companies believe they’ll perform better off as a private company, freed from some regulatory burdens and Wall Street’s quarter-by-quarter scrutiny of earnings results. At the same time some private companies are now raising more money by coming to market with initial public offerings.

So where is all this money coming from? Much of it is the result of low interest rates, in part thanks to a Federal Reserve policy that is trying to keep the U.S.. economy from sliding into a recession. With energy prices rising and the real estate industry mired in a slump, the pace of U.S. economic growth slowed to just 1.3 percent in the first quarter of 2007.

But while U.S economic growth has been lackluster, the rest of the global economy is firing on all cylinders.

“Typically the U.S. is the locomotive that pulls the rest of the world,” said market strategist Barry Ritholtz of Ritholtz Research. “But in the present environment, we're pretty much the caboose.”

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

Fear trumps efforts to solve crisis Treasury plan to buy bank stakes carries risks Amid crisis, states forced to take ‘drastic action’ Global rate cut does little to calm markets Economists getting gloomier about outlook How massive bailout plan will affect you Economists say rescue plan still needs work Rescue package still faces House hurdles Bailout deal nears, but will it work? Bailout plan sparks wide debate in Congress Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: