Investors took a record high for US stocks - the bellwether Dow Jones Industrial Index eclipsing its pre-global financial crisis peak - as confirmation that the US economic recovery is gathering strength and sent the local market to its highest close in 4 1/2 years.
Stockmarkets around the world have rallied this year on increasing confidence that the worst of the economic pain of the past five years may have passed and as investors switch out of low-yielding assets such as bonds.
Stocks are expected to continue posting gains, fuelled by a wall of money from investors chasing returns above those available in bank accounts and bonds, but local fund managers cautioned that the rise in prices was not yet being sustained by higher corporate earnings.
GRAPHIC: Wall Street record
The S&P/ASX 200 index added 41.4 points to 5116.8 points, its highest close since September 2008, with high-dividend-paying stocks, including Westpac, Commonwealth Bank of Australia and Woolworths, and stocks with US exposure such as James Hardie, closing at record highs. "We are in the early stages of a bull market," Wilson Asset Management chairman Geoff Wilson said. "We are out of the bear market."
The index is up 10.06 per cent so far this year, behind only Japan, Switzerland and Denmark in returns and ahead of the US, British and German markets. But it remains well short of its pre-GFC high of 6828.7 reached on November 1, 2007. It reached a low of 3145.5 on March 6, 2009.
The Dow Jones index of 30 leading US stocks added 125.95 points to close at 14253.77 points early on Wednesday morning Australian time, finally erasing the losses caused by the near-collapse of the global financial system between 2007 and 2009.
"It is a sign that the US economy is getting back on its feet and that can only be a positive for the Australian economy," said Shane Oliver, head of investment strategy at investment group AMP.
The Dow's previous high of 14,164 was reached on October 9, 2007, before a crisis that felled or humbled global businesses including Bear Stearns, Lehman Brothers, Merrill Lynch and AIG, and threw major economies around the world into recession.
The Dow fell to a low of 6547.05 on March 9, 2009, and has been climbing back since then, aided by low interest rates and stimulus from the US central bank
All but one of the 30 stocks in the Dow Jones Hewlett Packard have risen since the low of 2009, with gains led by American Express (up 489 per cent), mining equipment manufacturer Caterpillar (up 328 per cent), United Health (240 per cent) and Du Pont (213 per cent).
Economic growth in the US remains weak, but US economies have posted two years of strong profit gains as a result of heavy cost cutting and may now be seeing better times.
"The US looks increasingly attractive as a place to locate manufacturing as the abundance of relatively low-cost natural gas has helped spark a revival in the US manufacturing sector," the head of Capital Group Australia, Paul Hennessy, said.
"This means that global companies can look at the US and say 'With cheap energy, wages that haven't budged in 10 years and a relatively secure legal climate, why wouldn't we locate a factory there?"'
But Dr Oliver said the much broader S&P 500 index of US stocks remained shy of its 2007 record and less than 1 per cent above its high in the year 2000 when the US was gripped by the boom in technology stocks. "The broader (US) market has just spun its wheels for the past 13 years," Dr Oliver said.
Quest Asset Management partner Chris Cahill said the rise in global markets was driven by "flow and not fundamentals, and that is where the danger lies". But he said the rise of the US market was now being driven by smaller stocks, unlike Australia, where blue chips are still favoured by investors.
"That implies that buyers viewing the US equity market really feel that the US is off the bottom, QE (quantitative easing) is going to continue . . . and the growth prospects have certainly improved from a very low base," said Mr Cahill.
Hugh Giddy, senior portfolio manager at fund manager Investors Mutual, said he was not convinced by the rally in the US.
"There seems to be a disconnect from real fundamentals of what can be achieved by companies and what the environment they face will be."
Australian investors have been steadily increasing their exposure to foreign shares since 2009 as returns flattened out in the Australian market, with the average fund holding between 21 and 25 per cent of assets in international equities.
They held more than $US111 billion in US equities, according to the latest official count by the US Treasury in June last year.
That amount has almost doubled since its 2009 low of $US61bn, although much of the increase was probably explained by the recovery in prices, rather than by sharply higher allocations to the US, analysts said.
Local investors expect the Australian market to press higher because of investors chasing returns, but cautioned that the market needed to see stronger corporate earnings to sustain earnings.
In the interim profit reporting season that ended last week, average earnings across the market were slightly below last year, dragged down by falling commodity prices that pushed mining company profits lower.
Montgomery Investment Management founder Roger Montgomery said the market was likely to go higher.
"If that happens, it doesn't seem to be justified by the metrics for the companies that we are analysing to produce our intrinsic values."
Evergreen Capital chief investment officer Tim Hannon said he was concerned about the rise in the local market.
"We are not seeing any evidence of strong fundamentals or earnings recovery coming through for our Australian companies," Mr Hannon said.
"So I think in the case of Australia, the rally isn't sustainable and not backed up by fundamentals."
