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Stocks rally to levels not seen since 2001

Fueled by upbeat corporate and economic news, two major stock market indexes soared Monday to their highest levels in 2{ years.

The widely watched Dow Jones Industrial Average advanced 134 points to close above 10,700, while the tech-driven Nasdaq index rose nearly 30 points to 2,153.83. Both indexes haven't seen such heights since June 2001.

Better yet, the small-stock Russell 2000 index closed less than 5 points below its all-time, precrash high of 606.05 on March 9, 2000.

As usual, the day's strong gains got mixed reviews.

On the positive side, investors were buoyed by comments from Federal Reserve chairman Alan Greenspan, who said in a speech by satellite to an economic conference in London, said history has demonstrated that a flexible U.S. economy would be able to recoup the 2.8-million manufacturing jobs lost in the last downturn, although many laid-off workers will need to be retrained for new skills.

"We can thus be confident that new jobs will replace old ones as they always have, but not without a high degree of pain for those caught in the job-losing segment of America's massive job turnover process," Greenspan said.

David Wyss, chief economist at Standard & Poor's, and other analysts said it is possible that the Fed will keep its target for the federal funds rate, the interest that banks charge each other, at a 45-year low of 1 percent for all of 2004.

Also important for the Dow were share price gains of better than 3 percent each for Hewlett-Packard and Merck, two of the index's 30 stocks. About one-third of companies in the Standard & Poor's 500 have reported results so far, and earnings are up about 27 percent overall _ better than the 21 percent increase Wall Street had expected.

The Dow is now slightly more than 1,000 points away from its all-time high close of 11,722.98, reached on Jan. 14, 2000. The Standard & Poor's 500 index closed up 13.82, or 1.2 percent, at 1,155.37, following a weekly rise of 0.1 percent _ its ninth consecutive week of advances.

But the continued rise in the stock market without at least a 5 percent correction continues to make strategists nervous, since they are sure such a setback is coming. Bruce Bittles, chief strategist for Robert W. Baird & Co., said a sell off of as much as 10 percent in the first half of 2004 could happen.

"Considering the huge run of the past two months, a period of consolidation is likely next month," said Bittles. But he suggested that the correction would be "the platform" for the next rally into April.

The latest investor sentiment indexes all show bullish readings that analysts say are typical of market tops. The American Association of Individual Investors' survey last week found 69.5 percent of its members bullish vs. 13.4 percent who were bearish. Two weeks ago, the indexes were 67.2 percent and 17.9 percent, respectively.

One of the few events that might trigger a stock market sell off would be an increase in interest rates by the Federal Reserve. But analysts doubt that the Fed will do that at its two-day policy meeting, which begins today.

With jobs still hard to come by, the Fed is expected to keep promising to leave interest rates at rock bottom for a "considerable period." However, there is uncertainty over just what the phrase "considerable period" may mean.

Before an extremely weak unemployment report showed that the economy managed to create just 1,000 jobs in December, many analysts and investors thought the central bank would start raising interest rates as early as this spring to ensure that a booming economy did not set off inflation pressures.

However, that view is being reassessed in light of the December unemployment report, which raised concerns that the economy could still be in the grips of a jobless recovery two years after the 2001 recession ended.

Because of the weak jobs picture and dormant inflation, most economists are betting the Fed will put out a statement once again pledging to keep rates low "for a considerable period," a phrase which has shown up in the last four Fed statements, going back to last August.

"The Fed is not going to move until they see several months in a row of strong employment numbers, and that has not happened yet," Wyss said.

The advisory committee of the American Bankers Association, 10 top bank economists who give Fed officials their assessment of the economy twice a year, expects Fed rate increases will not occur until the last half of the year. And even when the Fed starts moving rates, the panel said, the increases will be moderate.

The group's median forecast is for the federal funds rate to be at 1.6 percent at the end of this year.

Sung Won Sohn, chief economist at Wells Fargo in Minneapolis and a member of the ABA panel, is even more optimistic, believing the Fed will leave rates alone for the entire year.

"In an election year, why raise interest rates unless you have a strong economic justification?" Sohn said.

The economic news was also positive on Monday, as the government said home resales advanced to a 6.5-million annual rate in December, ending the best year on record.

_ Information from Cox News Service and the Associated Press was used in this report.