Dow Tops 14,000, by a Nose

The blue-chip benchmark achieved its latest milestone as gains in tech shares overcame weakness in financial issues

Well, it was only by 0.41 of a point, but it counts all the same. Stocks reached another historic milestone Thursday, as the Dow Jones industrial average finally closed above the 14,000 mark it had been flirting with all week--by the slimmest of margins.

All-time record highs by seven of the 30 Dow components, including Exxon Mobil (XOM), Microsoft (MSFT), IBM (IBM) and Hewlett-Packard (HPQ) helped the blue-chip benchmark push past 14,000, overcoming pressure on financial stocks that appeared tied to Federal Reserve Chairman Ben Bernanke's testimony on Capitol Hill about subprime issues, among other topics.

On Thursday, the Dow Jones industrial average ended 82.19 points, or 0.59%, higher at 14,000.41 after hovering on either side of the threshold throughout the day. The broader S&P 500 index was up 6.91 points, or 0.45%, to 1,553.08. The tech-heavy Nasdaq Composite index rose 20.55 points, or 0.76%, to 2,720.04.

Market gains were driven by major institutional investors switching allocations between individual stocks and sectors rather than by individual investors on Thursday, according to CNBC Business News.

There's little reason to doubt the market's upward momentum can be sustained, in view of favorable economic conditions and stronger-than-expected earnings for the second quarter, said Brian Gendreau, investment strategist at ING Investment Management in New York.

"What probably isn't priced in [to the rally] is that the U.S. economy is growing faster than people think," he said. Measuring economic growth on the income side rather than the production side reveals that the economy grew 0.7% faster in 2006 than is indicated by the GDP data, he said. The higher income figures help explain why federal tax receipts have been so strong and why the federal deficit has fallen despite tax cuts.

"There seems to be a lot of unmeasured economic strength out there. That shows up eventually in earnings," he added.

Still, some observers are saying the equity-market rally seems unsustainable over the long term unless the financial stocks, stumbling under headline concerns, start to participate, commentators on CNBC Business News said. The financial firms now account for 20% of the Standard & Poor's 500 index.

If financial stocks seem to be falling out of favor, it's not telling investors to be wary of the overall market but of rotation within portfolios away from value stocks--which had a good run--back toward growth stocks, which are likely to keep the rally going, said Lincoln Anderson, chief investment officer at LPL Financial Services in Boston.

He sees the warnings about subprime contagion as overstated and said it's not the investment banks whose run has ended, but those mortgage units within the banks that were making money on interest-rate spreads.

In economic news Thursday, Bernanke responded to questions from members of the Senate Banking Committee about the extent of the subprime lending crisis. He said that while nothing is really wrong with structured credit products per se, the quality of some of the mortgage backed paper wasn't as good as first presumed. He acknowledged that there will be substantial losses associated with subprimes, with estimates ranging from about $50 billion to $100 billion.

As far as the Fed's main task to control inflation, he said in order to be convinced that long-term inflation was moderating, the Fed needs to see lower food and energy prices and slightly higher unemployment rates, which would ease upward pressure on wages.

The Fed's hawkish view on inflation was highlighted in minutes from the FOMC's June meeting released Thursday, which cited additional risks that could keep pressure on the Fed for further tightening, including elevated energy and commodity prices, weakness in the dollar and slower productivity growth.