by Liu Fan, Jiang Hanlu
NEW YORK, Feb. 2 (Xinhua) -- The Dow Jones Industrial Average on Friday closed above 14,000 for the first time since October 2007, after flirting with the important psychological mark throughout the trading day.
By the closing bell, the Dow rallied 149.21 points, or 1.08 percent, to 14,009.07, less than 200 points from its all-time closing high of 14164.53 set on Oct. 9, 2007.
REASONS FOR THE RALLY
A crucial reason for the rally is the Federal Reserve flooding the market with liquidity and keeping federal funds rate target at close to zero, which increased investors' risk appetite to sell bonds and buy stocks.
"The Fed's stimulus forced this trade," Kenneth Polcari, director of New York Stock Exchange Floor Operations at O'Neil Securities, told Xinhua.
In a zero-interest environment, there is no where else than the stock market that investors could get some type of return for their money, Jason A. Weisberg, managing director at Seaport Securities, told Xinhua.
People seeking yields were driven into the equity class and involve themselves in "risk trade, ... and they become buyers, so the market is higher," Polcari said.
At its most recent policy meeting, the Federal Reserve decided to maintain its current ultra-loose monetary policy and continue massive asset purchases at a pace of 85 billion dollars per month on concerns that the U.S. economic activity has "paused in recent months."
According to Trim Tabs Investment Research, 78 billion dollars flowed into stock mutual funds and exchange-traded funds in January, the biggest monthly total since at least 2000.
Yields on 10-year Treasury notes have risen 14.8 percent year-to-date to 2.02 percent on Friday.
Better-than-expected corporate earnings in the fourth quarter also played a part in the rally.
According to Thomson Reuters data, of the 252 companies in the S&P 500 that have reported earnings so far, 69 percent have exceeded expectations, higher than the past four quarters and above average since 1994.
AS JANUARY GOES, SO DOES THE YEAR
The U.S. market has staged a strong start this year with the Dow up 6 percent and the S&P 500 up 5 percent, logging the best monthly gains since 2011 October and the best January since 1994 and 1997, respectively.
"There's a lot of truth to January setting the tone in terms of optimism for the year," Terry Dolan, chief executive officer of Benjamin & Jerold Brokerage, told CNBC in an interview.
Most traders believe the 2013 stock market will end up this year in a better place than today's level.
Weisberg predicted that the Dow would probably reach a new record high in the fourth quarter of 2013.
But they also warned that the market got a little bit ahead of itself and would see pull-backs along the way in order to rally in a healthy way.
"The fundamentals in the economy of the country really have to catch up to where we are," Polcari said, adding that "investors still need to approach with caution."
FED, SEQUESTRATION REMAIN AS CONCERNS
The sustainability of the Fed's massive quantitative easing and the imminent sequestration of spending cuts remain to be two major concerns of the market.
St. Louis Fed President James Bullard, a voting member of the Federal Open Market Committee, said Friday that the Fed could slow down, rather than abruptly stop, its 85-billion-dollar monthly asset purchases if the economy continues to improve as the year progresses.
But after the release of the latest GDP data, the Fed is not likely to pull back any time soon, Polcari noted.
In Washington, both chambers of the U.S. Congress have passed the bill for a short-term extension of the federal government's debt limit until May 19. But the automatic government spending cuts will arrive on March 1 whatsoever.
Given the impact of the "fiscal cliff" wrangles in December, the debt-limit talks will leave an impact no smaller than the previous one.
"The market will probably pause here with a couple hundreds points off the 14,000 level of the Dow," Jason said.
In the long term, "the Dow should probably approach somewhere in a range between 14,750 to 15,000 towards the end of Q4, assuming the market, the U.S. and world economy would not completely unravel because of major geopolitical disasters," Jason said.
"We won't go a straight line, but we will go higher," he said.