Dow reaches record highs on optimism about economy

By Ryan Vlastelica

NEW YORK (Reuters) - The Dow Jones Industrial Average surged to a record high on Tuesday, breaking through levels last seen in 2007 as equities jumped 1 percent in a broad rally.

Investors poured money into blue-chip stocks in expectation of more gains amid signs of a strengthening U.S. economy. With the day's advance, the Dow has gained nearly 9 percent so far this year, ahead of the S&P 500 and Nasdaq Composite Index. Ten of the Dow's 30 component stocks reached new 52-week highs on a day when 418 stocks hit new yearly highs on the New York Stock Exchange.

Analysts said Tuesday's advance was linked less to one specific catalyst and more to the same factors that have been driving the rally this year, namely, attractive valuations and liquidity resulting from the U.S. Federal Reserve's easy monetary policies.

"Just because we're testing old highs doesn't necessarily mean the markets are going to capitulate. The underlying fundamentals still remain in place," said Joseph Tanious, global market strategist at J.P. Morgan Funds in New York.

Markets have shrugged off the stalemate between the congressional Republicans and the White House over automatic U.S. government spending cuts, known as the "sequester." Other recent headwinds, including political turmoil, have also been navigated without much pain, with investors using any decline as an opportunity to buy.

"It's been a bumpy ride, obviously, the past few years, but it appears corporate America has proved its resilience once again," Tanious said.

The Dow is also on track to surpass the record closing high set on October 9, 2007, when it ended at 14,164.53.

The Dow's forward 12-month price-to-earnings ratio was at 15.87, compared with 16.99 during the 2007 highs, according to Datastream. The S&P 500's price-to-earnings ratio was at 13.5.

Among Dow stocks hitting all-time highs on Tuesday were Walt Disney Co and 3M Co . All 10 of the S&P 500's industrial sector indexes rose.

The Dow Jones industrial average was up 137.37 points, or 0.97 percent, at 14,265.19. The Standard & Poor's 500 Index was up 15.18 points, or 1.00 percent, at 1,540.38. The Nasdaq Composite Index was up 38.28 points, or 1.20 percent, at 3,220.32.

Tech stocks jumped, contributing to the larger gains in the Nasdaq. Qualcomm Inc was one of the biggest gainers, rising 1.9 percent to $67.89 after the world's leading supplier of chips for cellphones said it was raising its quarterly cash dividend by 40 percent.

BMC Software rose 4 percent to $42.42 and Micron Tech added 3.8 percent to $8.72.

CAUTIOUS OPTIMISM

Shortly after the opening bell, the Dow rose above 14,198.10, the intraday all-time high reached in October 2007, when the world was heading toward the financial crisis.

The broad benchmark S&P 500 is at a five-year high and about 2.3 percent away from its all-time intraday high of 1,576.09.

Equity investors have been welcoming signs of improvement in the U.S. economy - the latest sign was data showing that growth in the vast U.S. services sector accelerated to its fastest pace in a year in February.

But a big part of the rally that has continued in 2013 without a significant correction is the result of the U.S. Federal Reserve's easy monetary policy and the near zero short-term interest rates since December 2008.

As the market is aware that the cheap money from the Fed would have to eventually end, more investors were growing cautious.

"It's clear the economy isn't ready to have the Fed leave," said Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York. "No one thinks we're going into a crisis like we did after 2007, but the sense of play is very telling. Even though people are in the market, they're very cautious and searching for yield.

"The caution is frustrated caution."

(Editing by Nick Zieminski, Kenneth Barry and Jan Paschal)